Interferons regulate diverse immune functions through the transcriptional activation of hundreds of genes involved in anti-viral responses. The interferon-inducible ubiquitin-like protein ISG15 is expressed in cells in response to a variety of stress conditions like viral or bacterial infection and is present in its free form or is conjugated to cellular proteins. In addition, protein ubiquitination plays a regulatory role in the immune system. Many viruses modulate the ubiquitin (Ub) pathway to alter cellular signaling and the antiviral response. Ubiquitination of retroviral group-specific antigen precursors and matrix proteins of the Ebola, vesicular stomatitis, and rabies viruses by Nedd4 family HECT domain E3 ligases is an important step in facilitating viral release. We found that Nedd4 is negatively regulated by ISG15. Free ISG15 specifically bound to Nedd4 and blocked its interaction with Ub-E2 molecules, thus preventing further Ub transfer from E2 to E3. Furthermore, overexpression of ISG15 diminished the ability of Nedd4 to ubiquitinate viral matrix proteins and led to a decrease in the release of Ebola VP40 virus-like particles from the cells. These results point to a mechanistically novel function of ISG15 in the enhancement of the innate anti-viral response through specific inhibition of Nedd4 Ub-E3 activity. To our knowledge, this is the first example of a Ub-like protein with the ability to interfere with Ub-E2 and E3 interaction to inhibit protein ubiquitination.