Familial cylindromatosis is an autosomal dominant predisposition to tumours of skin appendages called cylindromas. Familial cylindromatosis is caused by mutations in a gene encoding the CYLD protein of previously unknown function. Here we show that CYLD is a deubiquitinating enzyme that negatively regulates activation of the transcription factor NF-kappaB by specific tumour-necrosis factor receptors (TNFRs). Loss of the deubiquitinating activity of CYLD correlates with tumorigenesis. CYLD inhibits activation of NF-kappaB by the TNFR family members CD40, XEDAR and EDAR in a manner that depends on the deubiquitinating activity of CYLD. Downregulation of CYLD by RNA-mediated interference augments both basal and CD40-mediated activation of NF-kappaB. The inhibition of NF-kappaB activation by CYLD is mediated, at least in part, by the deubiquitination and inactivation of TNFR-associated factor 2 (TRAF2) and, to a lesser extent, TRAF6. These results indicate that CYLD is a negative regulator of the cytokine-mediated activation of NF-kappaB that is required for appropriate cellular homeostasis of skin appendages.