ABSTRACT Coronaviruses express a deubiquitinating protein, the papain-like protease-2 (PLP2), that removes both ubiquitin and the ubiquitin-like interferon (IFN)-stimulated gene 15 (ISG15) protein from target proteins. ISG15 has antiviral activity against a number of viruses; therefore, we examined the effect of ISG15 conjugation (ISGylation) in a model of acute viral hepatitis induced by the murine hepatitis virus strain 3 (MHV-3) coronavirus. Mice deficient in the ISG15 deconjugating enzyme, ubiquitin-specific peptidase-18 (USP18), accumulate high levels of ISG15-conjugated proteins and are hypersensitive to type I IFN. Infecting USP18 −/− mice with MHV-3 resulted in extended survival (8 ± 1.2 versus 4 days) and in improved liver histology, a decreased inflammatory response, and viral titers 1 to 2 logs lower than in USP18 +/+ mice. The suppression of viral replication was not due to increased IFN since infected USP18 −/− mice had neither increased hepatic IFN-α, -β, or -γ mRNA nor circulating protein. Instead, delayed MHV-3 replication coincided with high levels of cellular ISGylation. Decreasing ISGylation by knockdown of the ISG15 E1 enzyme, Ube1L, in primary USP18 +/+ and USP18 −/− hepatocytes led to increased MHV-3 replication. Both in vitro and in vivo , increasing MHV-3 titers were coincident with increased PLP2 mRNA and decreased ISGylation over the course of infection. The pharmacologic inhibition of the PLP2 enzyme in vitro led to decreased MHV-3 replication. Overall, these results demonstrate the antiviral effect of ISGylation in an in vivo model of coronavirus-induced mouse hepatitis and illustrate that PLP2 manipulates the host innate immune response through the ISG15/USP18 pathway. IMPORTANCE There have been a number of serious worldwide pandemics due to widespread infections by coronavirus. This virus (in its many forms) is difficult to treat, in part because it is very good at finding “holes” in the way that the host (the infected individual) tries to control and eliminate the virus. In this study, we demonstrate that an important host viral defense—the ISG15 pathway—is only partially effective in controlling severe coronavirus infection. Activation of the pathway is very good at suppressing viral production, but over time the virus overwhelms the host response and the effects of the ISG15 pathway. These data provide insight into host-virus interactions during coronavirus infection and suggest that the ISG15 pathway is a reasonable target for controlling severe coronavirus infection although the best treatment will likely involve multiple pathways and targets.