Ubiquitin C-terminal hydrolases (UCH) are deubiquitinating enzymes which hydrolyze C-terminal esters and amides of ubiquitin. Here we report the processing of a number of ubiquitin derivatives by two human UCH isozymes (isozymes L1 and L3) and find that these enzymes show little discrimination based on the P1' amino acid, except that proline is cleaved slowly. Ubiquitinyllysine derivatives linked by the alpha- or epsilon-amino group are hydrolyzed at identical rates. Isozyme-specific hydrolytic preferences are only evident when the leaving group is large. The ubiquitin gene products can be cotranslationally processed by one or both of these UCH isozymes, and purified UbCEP52 can be hydrolyzed by UCH isozyme L3. Binding of nucleic acid by UbCEP52 converts it to a form resistant to processing by these enzymes, apparently because of the formation of a larger, more tightly folded substrate. Consistent with this postulate is the observation that these enzymes do not hydrolyze large ubiquitin derivatives such as N epsilon-ubiquitinyl-cytochrome-c, N epsilon-K48polyubiquitinyl-lysozyme, or an N alpha-ubiquitinyl-beta-galactosidase fusion protein. Thus, these enzymes rapidly and preferentially cleave small leaving groups such as amino acids and oligopeptides from the C-terminus of ubiquitin, but not larger leaving groups such as proteins. These data suggest that the physiological role of UCH is to hydrolyze small adducts of ubiquitin and to generate free monomeric ubiquitin from ubiquitin proproteins, but not to deubiquitinate ubiquitin-protein conjugates or disassemble polyubiquitin chains.