The E3 ubiquitin ligase c-Cbl ubiquitinates the G protein-coupled receptor protease-activated receptor 2 (PAR2), which is required for postendocytic sorting of activated receptors to lysosomes, where degradation terminates signaling. The mechanisms of PAR2 deubiquitination and its importance in trafficking and signaling of endocytosed PAR2 are unknown. We report that receptor deubiquitination occurs between early endosomes and lysosomes and involves the endosomal deubiquitinating proteases AMSH and UBPY. Expression of the catalytically inactive mutants, AMSH(D348A) and UBPY(C786S), caused an increase in PAR2 ubiquitination and trapped the receptor in early endosomes, thereby preventing lysosomal trafficking and degradation. Small interfering RNA knockdown of AMSH or UBPY also impaired deubiquitination, lysosomal trafficking, and degradation of PAR2. Trapping PAR2 in endosomes through expression of AMSH(D348A) or UBPY(C786S) did not prolong the association of PAR2 with β-arrestin2 or the duration of PAR2-induced ERK2 activation. Thus, AMSH and UBPY are essential for trafficking and down-regulation of PAR2 but not for regulating PAR2 dissociation from β-arrestin2 or PAR2-mediated ERK2 activation.