Drosophila GMP synthetase binds ubiquitin-specific protease 7 (USP7) and is required for its ability to deubiquitylate histone H2B. Previously, we showed that the GMPS/USP7 complex cooperates with the Polycomb silencing system through removal of the active ubiquitin mark from histone H2B (H2Bub). Here, we explored the interplay between GMPS and USP7 further and assessed their role in hormone-regulated gene expression. Genetic analysis established a strong cooperation between GMPS and USP7, which is counteracted by the histone H2B ubiquitin ligase BRE1. Loss of either GMPS or USP7 led to increased levels of histone H2Bub in mutant animals. These in vivo analyses complement our earlier biochemical results, establishing that GMPS/USP7 mediates histone H2B deubiquitylation. We found that GMPS/USP7 binds ecdysone-regulated loci and that mutants display severe misregulation of ecdysone target genes. Ecdysone receptor (EcR) interacts biochemically and genetically with GMPS/USP7. Genetic and gene expression analyses suggested that GMPS/USP7 acts as a transcriptional corepressor. These results revealed the cooperation between a biosynthetic enzyme and a ubiquitin protease in developmental gene control by hormone receptors.