In the early Caenorhabditis elegans embryo, establishment of cell polarity and cytokinesis are both dependent upon reorganization of the actin cytoskeleton. Mutations in the cyk-3 gene cause maternal effect embryonic lethality. Embryos produced by homozygous cyk-3 mutant animals become multinucleate. We have further analyzed the cyk-3 mutant phenotype and have found that cyk-3 mutant embryos fail to properly polarize the actin cytoskeleton and fail to segregate germline determinants. In addition, they fail to assemble an intact cleavage furrow. However, we have found that cyk-3 mutant embryos are intrinsically defective in osmotic regulation and that the cytokinesis defects can be partially rescued by providing osmotic support. The cyk-3 gene has been identified and found to encode a ubiquitin C-terminal hydrolase that is active against model substrates. These data indicate that the deubiquitination of certain substrates by CYK-3 is crucial for cellular osmoregulation. Defects in osmoregulation appear to indirectly affect actin-dependent processes.