The proto-oncogene Ras undergoes a series of post-translational modifications at its carboxyl-terminal CAAX motif that are essential for its proper membrane localization and function. One step in this process is the cleavage of the CAAX motif by the enzyme Ras-converting enzyme 1 (RCE1). Here we show that the deubiquitinating enzyme USP17 negatively regulates the activity of RCE1. We demonstrate that USP17 expression blocks Ras membrane localization and activation, thereby inhibiting phosphorylation of the downstream kinases MEK and ERK. Furthermore, we show that this effect is caused by the loss of RCE1 catalytic activity as a result of its deubiquitination by USP17. We also show that USP17 and RCE1 co-localize at the endoplasmic reticulum and that USP17 cannot block proliferation or Ras membrane localization in RCE1 null cells. These studies demonstrate that USP17 modulates Ras processing and activation, at least in part, by regulating RCE1 activity.