Dendritic cells (DCs) represent the key cells linking innate and adaptive immune responses. It is critical to understand the molecular factors regulating DC differentiation. Usp18 is an IFN-inducible member of the ubiquitin-specific protease family, which deconjugates ubiquitin-like modifier ISG15 from target proteins and competitively inhibits IFN-α/β-induced JAK/STAT activation. This study demonstrates that the frequency of conventional CD11b(+) DCs in the spleen of Usp18(-/-) mice was significantly reduced, whereas the frequencies of conventional CD8(+) DCs and plasmacytoid DCs remained normal. In addition, Usp18(-/-) bone marrow (BM) cells generate DCs less efficiently in GM-CSF-supplemented culture, demonstrating a fundamental defect throughout the DC differentiation pathway. Usp18(-/-) BM cells were rescued by exogenous expression of either wild-type or deconjugation-inactive Usp18, and superimposition of an IFN-α/β receptor knockout returned in vivo DC populations to normal, clearly showing that the defect seen is due solely to Usp18's effect on IFN signaling. Finally, Usp18(-/-) BM-derived DCs expressed high levels of SOCS1/SOCS3, known inhibitors of GM-CSF signaling, providing a mechanistic explanation for the phenotype. In conclusion, we have identified a novel role of Usp18 in modulating conventional CD11b(+) DC development via its inhibitory effect on type I IFN signaling.