Degradation of many eukaryotic proteins requires their prior ligation to polyubiquitin chains, which target substrates to the 26S proteasome, an abundant cellular protease. We describe a yeast deubiquitinating enzyme, Ubp14, that specifically disassembles unanchored ('free') ubiquitin chains in vitro, a specificity shared by mammalian isopeptidase T. Correspondingly, deletion of the UBP14 gene from yeast cells results in a striking accumulation of free ubiquitin chains, which correlates with defects in ubiquitin-dependent proteolysis. Increasing the steady-state levels of ubiquitin chains in wild-type cells (by expressing a derivative of ubiquitin with an altered C-terminus) inhibits protein degradation to a degree comparable with that observed in ubp14delta cells. Inhibition of degradation is also seen when an active site mutant of Ubp14 is overproduced in vivo. Surprisingly, overproduction of wild-type Ubp14 can inhibit degradation of some proteins as well. Finally, Ubp14 and human isopeptidase T are shown to be functional homologs by complementation analysis. We propose that Ubp14 and isopeptidase T facilitate proteolysis in vivo by preventing unanchored ubiquitin chains from competitively inhibiting polyubiquitin-substrate binding to the 26S proteasome.