The papain-like protease PLpro is an essential coronavirus enzyme that is required for processing viral polyproteins to generate a functional replicase complex and enable viral spread1,2. PLpro is also implicated in cleaving proteinaceous post-translational modifications on host proteins as an evasion mechanism against host antiviral immune responses3-5. Here we perform biochemical, structural and functional characterization of the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) PLpro (SCoV2-PLpro) and outline differences with SARS-CoV PLpro (SCoV-PLpro) in regulation of host interferon and NF-κB pathways. SCoV2-PLpro and SCoV-PLpro share 83% sequence identity but exhibit different host substrate preferences; SCoV2-PLpro preferentially cleaves the ubiquitin-like interferon-stimulated gene 15 protein (ISG15), whereas SCoV-PLpro predominantly targets ubiquitin chains. The crystal structure of SCoV2-PLpro in complex with ISG15 reveals distinctive interactions with the amino-terminal ubiquitin-like domain of ISG15, highlighting the high affinity and specificity of these interactions. Furthermore, upon infection, SCoV2-PLpro contributes to the cleavage of ISG15 from interferon responsive factor 3 (IRF3) and attenuates type I interferon responses. Notably, inhibition of SCoV2-PLpro with GRL-0617 impairs the virus-induced cytopathogenic effect, maintains the antiviral interferon pathway and reduces viral replication in infected cells. These results highlight a potential dual therapeutic strategy in which targeting of SCoV2-PLpro can suppress SARS-CoV-2 infection and promote antiviral immunity.