Type I IFNs have broad activity in tissue inflammation and malignant progression that depends on the expression of IFN-stimulated genes (ISGs). ISG15, one such ISG, can form covalent conjugates to many cellular proteins, a process termed "protein ISGylation." Although type I IFNs are involved in multiple inflammatory disorders, the role of protein ISGylation during inflammation has not been evaluated. Here we report that protein ISGylation exacerbates intestinal inflammation and colitis-associated colon cancer in mice. Mechanistically, we demonstrate that protein ISGylation negatively regulates the ubiquitin-proteasome system, leading to increased production of IFN-induced reactive oxygen species (ROS). The increased cellular ROS then enhances LPS-induced activation of p38 MAP kinase and the expression of inflammation-related cytokines in macrophages. Thus our studies reveal a regulatory role for protein ISGylation in colonic inflammation and its related malignant progression, indicating that targeting ubiquitin-activating enzyme E1 homolog has therapeutic potential in treating inflammatory diseases.