In an islanded inverter-interfaced microgrid (IIM), fault current is generally controlled at the same level of the normal operation current due to the limited capacities of inverters, rendering the conventional overcurrent protection methods impractical. To solve this issue, this paper presents a novel protection strategy, which incorporates flexible control of the inverter and setting of microprocessor-based relay (MBR). Once a short-circuit fault occurs at distribution line, a current limiting strategy combining with hysteresis control and maximum current root-mean square (RMS) control (MCRC) is applied for the inverter to limit the fault current within permissible range. In the MCRC mode, a percentage of fifth harmonic is injected to the fault current, facilitating the MBRs to identify the fault according to the harmonics components. Additionally, the fault current versus fault impedance (I-fault - Z(fault)) droop control is synthesized to make the inverters output larger fault currents when the faults are closer to the inverters, and hence, the MBRs can be coordinated with the inverse-time principle. The main advantages of this method are that it neither relies on high magnitude of the fault current to identify the fault nor needs communications among protective devices to ensure the coordination of protections. Experiments have been conducted to demonstrate the feasibility of this method.