The p53 tumor suppressor invokes cellular responses to stressful stimuli by coordinating distinct gene expression programs. This function relies heavily on the ability of p53 to function as a transcription factor by binding promoters of target genes in a sequence specific manner. The DNA binding activity of the core domain of p53 is subject to regulation via post-translational modifications of the C-terminal region. Here we show that the ubiquitin specific protease, USP7 or HAUSP, known to stabilize p53, also regulates the sequence-specific DNA binding mediated by the core domain of p53 in vitro. This regulation is contingent upon interaction between USP7 and the C-terminal regulatory region of p53. However, our data suggest that this effect is not mediated through the N-terminal domain of USP7 previously shown to bind p53, but rather involves the USP7 C-terminal domain and is independent of the deubiquitylation activity of USP7. Consistent with our in vitro observations, we found that overexpression of catalytically inactive USP7 in cells promotes p53 binding to its target sequences and p21 expression, without increasing the levels of p53 protein. We also found that the USP7 C-terminal domain was sufficient for p21 induction. Our results suggest a novel mode of regulation of p53 function by USP7, which is independent of USP7 deubiquitylating activity.