The dual specificity (Tyr/Thr) phosphatase Cdc25A activates cyclin-dependent kinases (Cdks) to promote cell-cycle progression and has significant oncogenic potential. Cdc25A protein levels are regulated tightly in normal tissues, but many human cancers overexpress Cdc25A. The underlying mechanism for overexpression has been enigmatic. Here we show that Cdc25A is stabilized by the ubiquitin hydrolase Dub3. Upon binding Cdc25A, Dub3 removes the polyubiquitin modifications that mark Cdc25A for proteasomal degradation. Dub3 knockdown in cells increased Cdc25A ubiquitylation and degradation, resulting in reduced Cdk/Cyclin activity and arrest at G1/S and G2/M phases of the cell cycle. In contrast, acute Dub3 overexpression produced a signature response to oncogene induction: cells accumulated in S and G2 because of replication stress, and activated a DNA damage response. Dub3 also transformed NIH-3T3 cells and cooperated with activated H-Ras to promote growth in soft agar. Importantly, we show that Dub3 overexpression is responsible for an abnormally high level of Cdc25A in a subset of human breast cancers. Moreover, Dub3 knockdown significantly retarded the growth of breast tumour xenografts in nude mice. As a major regulator of Cdc25A, Dub3 is an example of a transforming ubiquitin hydrolase that subverts a key component of the cell cycle machinery.