A system and method for optimized control of an assembly for drilling a borehole comprises a self-tuning, multivariable controller and an optimization engine that manipulates the setpoints of the controller such that drilling performance may be continuously optimized. The method includes evaluation of a characteristic system time constant, using this constant to compute bit ROP, using computed ROP to compute process gains, which are used to tune the multivariable controller, automatically refining controller setpoints based on controller performance, and using an optimization engine to systematically adjust controller setpoints such that drilling parameters are optimized based on any of several performance indicators, or a weighted combination of performance indicators. The method further comprises using at least one performance indicators which may be computed using estimated bit ROP: bit wear parameter; gradient of cost per foot; gradient of bit ROP versus WOB; simplified mechanical specific energy; and hydraulic specific energy.