SARS-CoV-2 is the pathogen responsible for the COVID-19 pandemic. The SARS-CoV-2 papain-like cysteine protease (PLpro) has been implicated in playing important roles in virus maturation, dysregulation of host inflammation, and antiviral immune responses. The multiple functions of PLpro render it a promising drug target. Therefore, we screened a library of approved drugs and also examined available inhibitors against PLpro. Inhibitor GRL0617 showed a promising in vitro IC50 of 2.1 μM and an effective antiviral inhibition in cell-based assays. The co-crystal structure of SARS-CoV-2 PLproC111S in complex with GRL0617 indicates that GRL0617 is a non-covalent inhibitor and it resides in the ubiquitin-specific proteases (USP) domain of PLpro. NMR data indicate that GRL0617 blocks the binding of ISG15 C-terminus to PLpro. Using truncated ISG15 mutants, we show that the C-terminus of ISG15 plays a dominant role in binding PLpro. Structural analysis reveals that the ISG15 C-terminus binding pocket in PLpro contributes a disproportionately large portion of binding energy, thus this pocket is a hot spot for antiviral drug discovery targeting PLpro.