This study presents a novel islanding detection and optimal load shedding scheme for radial distribution systems integrated with dispersed generation (DG). A simple and effective passive islanding detection method is developed based on the phase-space technique and using a probabilistic neural network-based classifier. After the system detects unintentional islanding state, it utilises an optimal load shedding scheme to prevent system collapse due to load-generation mismatch and voltage instability encountered in the islanded part of the system. The optimal load shedding scheme is developed based on the backtracking search algorithm. Extensive tests conducted with the DigSilent Power Factory((R)) software and MATLAB((R)) software on the IEEE 33-bus system with four DG units considering several scenarios of islanding condition were utilised to evaluate the effectiveness of the proposed islanding detection method and the optimal load shedding scheme. The results showed that the proposed method can effectively detect the islanding events and stabilise the islanded part of the system with minimum load curtailment.