The chb operon of Escherichia coli is involved in the utilization of the β-glucosides chitobiose and cellobiose. The function of chbG (ydjC), the sixth open reading frame of the operon that codes for an evolutionarily conserved protein is unknown. We show that chbG encodes a monodeacetylase that is essential for growth on the acetylated chitooligosaccharides chitobiose and chitotriose but is dispensable for growth on cellobiose and chitosan dimer, the deacetylated form of chitobiose. The predicted active site of the enzyme was validated by demonstrating loss of function upon substitution of its putative metal-binding residues that are conserved across the YdjC family of proteins. We show that activation of the chb promoter by the regulatory protein ChbR is dependent on ChbG, suggesting that deacetylation of chitobiose-6-P and chitotriose-6-P is necessary for their recognition by ChbR as inducers. Strains carrying mutations in chbR conferring the ability to grow on both cellobiose and chitobiose are independent of chbG function for induction, suggesting that gain of function mutations in ChbR allow it to recognize the acetylated form of the oligosaccharides. ChbR-independent expression of the permease and phospho-β-glucosidase from a heterologous promoter did not support growth on both chitobiose and chitotriose in the absence of chbG, suggesting an additional role of chbG in the hydrolysis of chitooligosaccharides. The homologs of chbG in metazoans have been implicated in development and inflammatory diseases of the intestine, indicating that understanding the function of E. coli chbG has a broader significance.