FOXO (Forkhead box O) transcription factors are important regulators of cellular metabolism, cell-cycle progression and cell death. FOXO activity is regulated by multiple post-translational modifications, including phosphorylation, acetylation and polyubiquitination. Here, we show that FOXO becomes monoubiquitinated in response to increased cellular oxidative stress, resulting in its re-localization to the nucleus and an increase in its transcriptional activity. Deubiquitination of FOXO requires the deubiquitinating enzyme USP7/HAUSP (herpesvirus-associated ubiquitin-specific protease), which interacts with and deubiquitinates FOXO in response to oxidative stress. Oxidative stress-induced ubiquitination and deubiquitination by USP7 do not influence FOXO protein half-life. However, USP7 does negatively regulate FOXO transcriptional activity towards endogenous promoters. Our results demonstrate a novel mechanism of FOXO regulation and indicate that USP7 has an important role in regulating FOXO-mediated stress responses.