The mechanism by which Wnt receptors transduce signals to activate downstream beta-catenin-mediated target gene transcription remains incompletely understood but involves Frizzled (Fz) receptor-mediated plasma membrane recruitment and activation of the cytoplasmic effector Dishevelled (Dvl). Here, we identify the deubiquitinating enzyme CYLD, the familial cylindromatosis tumor suppressor gene, as a negative regulator of proximal events in Wnt/beta-catenin signaling. Depletion of CYLD from cultured cells markedly enhances Wnt-induced accumulation of beta-catenin and target gene activation. Moreover, we demonstrate hyperactive Wnt signaling in human cylindroma skin tumors that arise from mutations in CYLD. At the molecular level, CYLD interacts with and regulates K63-linked ubiquitination of Dvl. Enhanced ubiquitination of the polymerization-prone DIX domain in CYLD-deficient cells positively links to the signaling activity of Dvl. Together, our results argue that loss of CYLD instigates tumor growth in human cylindromatosis through a mechanism in which hyperubiquitination of polymerized Dvl drives enhancement of Wnt responses.