Of the several hundred proteins induced by interferon (IFN) alpha/beta, the ubiquitin-like ISG15 protein is one of the most predominant. We demonstrate the novel way in which the function of the ISG15 protein is inhibited by influenza B virus, which strongly induces the ISG15 protein: a specific region of the influenza B virus NS1 protein, which includes part of its effector domain, blocks the covalent linkage of ISG15 to its target proteins both in vitro and in infected cells. We identify UBE1L as the E1 enzyme that catalyzes the first activation step in the conjugation of ISG15, and show that the NS1B protein inhibits this activation step in vitro. Influenza A virus employs a different strategy: its NS1 protein does not bind the ISG15 protein, but little or no ISG15 protein is produced during infection. We discuss the likely basis for these different strategies.