The nucleolus is a subnuclear compartment and the site of ribosome biogenesis. Previous studies have implicated protein ubiquitylation in nucleolar activity. Here we show that USP36, a deubiquitylating enzyme of unknown function, regulates nucleolar activity in mammalian cells. USP36 localized to nucleoli via the C-terminal region, which contains basic amino acid stretches. Dominant-negative inhibition of USP36 caused the accumulation of ubiquitin-protein conjugates in nucleoli, suggesting that nucleoli are the site of USP36 action. USP36 deubiquitylated the nucleolar proteins nucleophosmin/B23 and fibrillarin, and stabilized them by counteracting ubiquitylation-mediated proteasomal degradation. RNAi-mediated depletion of cellular USP36 resulted in reduced levels of rRNA transcription and processing, a less-developed nucleolar morphology and a slight reduction in the cytoplasmic ribosome level, which eventually led to a reduced rate of cell proliferation. We conclude that by deubiquitylating various nucleolar substrate proteins including nucleophosmin/B23 and fibrillarin, USP36 plays a crucial role in regulating the structure and function of nucleoli.