This paper presents a new centralized adaptive underfrequency load shedding controller that is integrated with a distribution state estimator to improve the frequency stability of islanded microgrids. While underfrequency load shedding is a well-established corrective emergency frequency-control action, it is not entirely suitable for use in microgrids with low inertia and a limited number of measurement devices. The novel centralized controller presented in this paper overcomes these challenges by incorporating a distribution state estimator to estimate the power consumption of the demand. In parallel to this, the actual active power imbalance in the microgrid is estimated by simultaneously monitoring the system frequency and its rate of change. The centralized controller uses these two variables to determine the correct amount of load to be shed. The performance of the proposed controller has been validated using computer simulations of the actual distribution network in Malaysia. These simulation results show the effectiveness of the proposed centralized controller for preventing power system instabilities, which might lead to cascading outages and even a complete blackout in microgrids that have been disconnected/islanded, from the main grid.