Induction of the 17-kDa ubiquitin-like protein ISG15/UCRP and its subsequent conjugation to cellular targets is the earliest response to type I interferons. The polypeptide is synthesized as a precursor containing a carboxyl-terminal extension whose correct processing is required for subsequent ligation of the exposed mature carboxyl terminus. Recombinant pro-ISG15 is processed in extracts of human lung fibroblasts by a constitutive 100-kDa enzyme whose activity is unaffected by type I interferon stimulation. The processing enzyme has been purified to apparent homogeneity by a combination of ion exchange and hydrophobic chromatography and found to be stimulated 12-fold by micromolar concentrations of ubiquitin. Analysis of the products of pro-ISG15 processing enzyme demonstrates specific cleavage exclusively at the Gly(157)-Gly(158) peptide bond to generate a mature ISG15 carboxyl terminus. Irreversible inhibition of pro-ISG15 processing activity by thiol-specific alkylating agents and a pH rate dependence conforming to titration of a single group of pK(a) 8.1 indicate the 100-kDa enzyme is a thiol protease. Partial sequencing of a trypsin-derived peptide indicates the enzyme is either the human ortholog of yeast Ubp1 or a Ubp1-related protein. As yeast do not contain ISG15, these results suggest that a ubiquitin-specific enzyme was recruited for pro-ISG15/UCRP processing by adaptive divergence.