Endoribonuclease DICER is an RNase III enzyme that mainly processes microRNAs in the cytoplasm but also participates in nuclear functions such as chromatin remodelling, epigenetic modification and DNA damage repair. The expression of nuclear DICER is low in most human cancers, suggesting a tight regulation mechanism that is not well understood. Here, we found that ubiquitin carboxyl-terminal hydrolase 7 (USP7), a deubiquitinase, bounded to DICER and reduced its nuclear protein level by promoting its ubiquitination and degradation through MDM2, a newly identified E3 ubiquitin-protein ligase for DICER. This USP7-MDM2-DICER axis impaired histone γ-H2AX signalling and the recruitment of DNA damage response (DDR) factors, possibly by influencing the processing of small DDR noncoding RNAs. We also showed that this negative regulation of DICER by USP7 via MDM2 was relevant to human tumours using cellular and clinical data. Our findings revealed a new way to understand the role of DICER in malignant tumour development and may offer new insights into the diagnosis, treatment and prognosis of cancers.