Owing to their millisecond-scale temporal resolution, magnetoencephalography (MEG) and electroencephalography (EEG) are well-suited tools to study dynamic functional connectivity between regions in the human brain. However, current techniques to estimate functional connectivity from MEG/EEG are based on a two-step approach; first, the MEG/EEG inverse problem is solved to estimate the source activity, and second, connectivity is estimated between the sources. In this work, we propose a method for simultaneous estimation of source activities and their dynamic functional connectivity using a Kalman filter. Based on simulations, our approach can reliably estimate source activities and resolve their time-varying interactions even at low SNR (<; 1). When applied on empirical MEG responses to simple visual stimuli, our approach could capture the dynamic patterns of the underlying functional connectivity changes between the lower (pericalcarine) and higher (fusiform and parahippocampal) visual areas. In conclusion, we demonstrate that our approach is capable of tracking changes in functional connectivity at the millisecond resolution of MEG/EEG and thus making it suitable for real-time tracking of functional connectivity, which none of the current techniques are capable of.