The release of retroviruses from cells requires ubiquitination of Gag and recruitment of cellular proteins involved in endosome sorting, including the ESCRT-III proteins and the Vps4 ATPase. In response to infection, cells have evolved an interferon-induced mechanism to block virus replication through expression of the interferon-stimulated gene 15 (ISG15), a dimer homologue of ubiquitin, which interferes with ubiquitin pathways in cells. Previously, it has been reported that ISG15 expression inhibited the E3 ubiquitin ligase, Nedd4, and prevented association of the ESCRT-I protein Tsg101 with human immunodeficiency virus type 1 (HIV-1) Gag. The budding of avian sarcoma leukosis virus and HIV-1 Gag virus-like particles containing L-domain mutations can be rescued by fusion to ESCRT proteins, which cause entry into the budding pathway beyond these early steps. The release of these fusions from cells was susceptible to inhibition by ISG15, indicating that there was a block late in the budding process. We now demonstrate that the Vps4 protein does not associate with the avian sarcoma leukosis virus or the HIV-1 budding complexes when ISG15 is expressed. This is caused by a loss in interaction between Vps4 with its coactivator protein LIP5 needed to promote the formation of the ESCRT-III-Vps4 double-hexamer complex required for membrane scission and virus release. The inability of LIP5 to interact with Vps4 is the probable result of ISG15 conjugation to the ESCRT-III protein, CHMP5, which regulates the availability of LIP5. Thus, there appear to be multiple levels of ISG15-induced inhibition acting at different stages of the virus release process.