The Tar Heels freshman, who was averaging 2.9 points and 1.6 assists per game, will not be eligible to participate in any university activities, the school announced Tuesday.
The school also said it will not comment further because of federal privacy laws.
Felton is the nephew of former North Carolina standout and current NBA point guard Raymond Felton.
The Tar Heels (16-6) play at Clemson on Tuesday night.
Felton's attorney, Kerry Sutton of Durham, North Carolina, told ESPN that UNC officials have suspended Felton while they gather information about an alleged incident.
"The suspension is what we call an interim suspension," Sutton said. "It's not punishment or discipline. Sometimes schools do this while they're gathering information. We're gathering information and they're gathering information. It might be a short-lived suspension. We don't know enough yet."
Sutton previously represented one of the Duke lacrosse players who was wrongfully accused of sexually assaulting a stripper during a party in 2006. She also represented Tar Heels linebacker Allen Artis, who was suspended from the team in 2016 after a fellow UNC student accused him of rape. Artis denied wrongdoing and was cleared in a Title IX investigation. The Orange County (North Carolina) District Attorney's office also dismissed misdemeanor criminal charges against him.
ESPN's Mark Schlabach contributed to this report.