Neuroinflammation is a fundamental contributor to progressive neuronal damage, which arouses a heightened interest in neurodegenerative disease therapy. Ubiquitin-specific protease 7 (USP7) has a crucial role in regulating protein stability in multiple biological processes; however, the potential role of USP7 in neurodegenerative progression is poorly understood. Here, we discover the natural small molecule eupalinolide B (EB), which targets USP7 to inhibit microglia activation. Cocrystal structure reveals a previously undisclosed covalent allosteric site, Cys576, in a unique noncatalytic HUBL domain. By selectively modifying Cys576, EB allosterically inhibits USP7 to cause a ubiquitination-dependent degradation of Keap1. Keap1 function loss further results in an Nrf2-dependent transcription activation of anti-neuroinflammation genes in microglia. In vivo, pharmacological USP7 inhibition attenuates microglia activation and resultant neuron injury, thereby notably improving behavioral deficits in dementia and Parkinson's disease mouse models. Collectively, our findings provide an attractive future direction for neurodegenerative disease therapy by inhibiting microglia-mediated neuroinflammation by targeting USP7.