Ligation of the ubiquitin-like protein SUMO (Smt3p) to other proteins is essential for viability of the yeast Saccharomyces cerevisiae. Like ubiquitin (Ub), SUMO undergoes ATP-dependent activation by a specific activating enzyme. SUMO-activating enzyme is a heterodimer composed of Uba2p and Aos1p, polypeptides with sequence similarities, respectively, to the C- and N-terminal parts of Ub-activating enzyme. To study the function of SUMO conjugation, we isolated uba2 mutants that were temperature-sensitive for growth. In these mutants conjugation of SUMO to other proteins was drastically reduced, even at the temperature permissive for growth. In a screen for spontaneous suppressors of the temperature-sensitive growth phenotype of the mutant uha2-ts9, we isolated a strain with a null mutation (sut9) in a gene of hitherto unknown function (SUT9/YIL031W/SMT4). This gene encodes a protein with similarities to Ulp1p, a dual-function protease that processes the SUMO precursor and deconjugates SUMO from its substrates. The novel protein was therefore termed Ulp2p. Inactivation of ULP2 in a strain expressing wild-type SUMO-activating enzyme resulted in slow and temperature-sensitive growth, and accumulation of SUMO conjugates. Thus, mutations in SUMO-activating enzyme and mutations in Ulp2p suppress each other, indicating that SUMO conjugation and deconjugation must be in balance for cells to grow normally. Other phenotypes of ulp2 mutants include a defect in cell cycle progression, hypersensitivity to DNA damage, and chromosome mis-segregation. Ulp2p is predominantly located within the nucleus, whereas Ulp1p colocalizes with nuclear pore complex proteins, indicating that the apparently distinct functions of the two SUMO deconjugating enzymes are spatially separated.