Deubiquitinating enzymes constitute a family of cysteine hydrolases that specifically cleave ubiquitin-derived substrates of general structure Ub-X, where X can be any number of leaving groups ranging from small thiols and amines to Ub and other proteins (Ub, ubiquitin). We have developed a general assay for deubiquitinating enzymes based on the substrate ubiquitin C-terminal 7-amido-4-methylcoumarin (Ub-AMC). Ub-AMC is efficiently hydrolyzed with liberation of highly fluorescent AMC by two rabbit reticulocyte deubiquitinating enzymes: isopeptidase T (IPaseT), a member of the gene family of ubiquitin-specific processing enzymes, and UCH-L3, a member of the family of ubiquitin C-terminal hydrolases. We used this new assay to probe kinetic and mechanistic aspects of catalysis by IPaseT and UCH-L3. Results from four series of experiments are discussed: (1) For UCH-L3, we determined steady-state kinetic parameters that suggest a diffusion-limited reaction of UCH-L3 with Ub-AMC. To probe this, we determined the viscosity dependence of kc/Km, as well as kc. We found complex viscosity dependencies and interpreted these in the context of a model in which association and acylation are viscosity-dependent but deacylation is viscosity-independent. (2) The kinetics of inhibition of UCH-L3 by ubiquitin C-terminal aldehyde (Ub-H) were determined and reveal a Ki that is less than 10(-14) M. Several mechanisms are considered to account for the extreme inhibition. (3) The IPaseT-catalyzed hydrolysis of Ub-AMC is modulated by Ub with activation at low [Ub] and inhibition at high [Ub]. (4) Finally, we compare kc/Km values for deubiquitinating enzyme-catalyzed hydrolysis of Ub-AMC and Z-Leu-Arg-Gly-Gly-AMC. For IPaseT, the ratio of rate constants is 10(4), while for UCH-L3 this ratio is > 10(7). These results suggest the following: (i) Deubiquitinating enzymes are able to utilize the free energy that is released from remote interactions with Ub-containing substrates for stabilization of catalytic transition states, and (ii) UCHs are more efficient at utilizing the energy from these interactions, presumably because they do not possess a binding domain for a Ub "leaving group".