Mutations in the CYLD gene cause tumors of hair-follicle keratinocytes. The CYLD gene encodes a deubiquitinase that removes lysine 63-linked ubiquitin chains from TRAF2 and inhibits p65/p50 NF-kappaB activation. Here we show that mice lacking Cyld are highly susceptible to chemically induced skin tumors. Cyld-/- tumors and keratinocytes treated with 12-O-tetradecanoylphorbol-13 acetate (TPA) or UV light are hyperproliferative and have elevated cyclin D1 levels. The cyclin D1 elevation is caused not by increased p65/p50 action but rather by increased nuclear activity of Bcl-3-associated NF-kappaB p50 and p52. In Cyld+/+ keratinocytes, TPA or UV light triggers the translocation of Cyld from the cytoplasm to the perinuclear region, where Cyld binds and deubiquitinates Bcl-3, thereby preventing nuclear accumulation of Bcl-3 and p50/Bcl-3- or p52/Bcl-3-dependent proliferation. These data indicate that, depending on the external signals, Cyld can negatively regulate different NF-kappaB pathways; inactivation of TRAF2 controls survival and inflammation, while inhibition of Bcl-3 controls proliferation and tumor growth.