This paper describes the development of a new islanding detection method for inverter-based distributed generation systems, which uses a signal cross-correlation scheme between the injected reactive current and the power frequency deviation. The proposed method injects 1% of the reactive current to the rated current which brings about a negligible degradation of the power quality. It discriminates the islanding state, when the calculated cross-correlation index is larger than 0.5. The operational feasibility was verified through computer simulations with PSCAD/EMTDC software and experimental research with a hardware prototype. The proposed method can detect the islanding state without degrading the power quality at the point of common connection. Further study is required to overcome the cancellation of the injected reactive current from multiple distributed generation units interconnected with the utility grid.