The 97-kDa valosin-containing protein (p97-VCP) plays a role in a wide variety of cellular activities, many of which are regulated by the ubiquitin-proteasome (Ub-Pr)-mediated degradation pathway. We previously demonstrated that VCP binds to multi-ubiquitin chains and may act as a molecular chaperone that targets the ubiquitinated substrates to the proteasome for degradation. In this report, we show that although the ubiquitin chain-binding activity, carried out by the N-terminal 200 residues (N domain), is necessary for the degradation of proteasome substrates, it is not sufficient. Using in vitro degradation assays, we demonstrated that the entire VCP molecule, consisting of the N domain and two ATPase domains D1 and D2, is required for mediating the Ub-Pr degradation. The ATPase activity of VCP requires Mg(2+), and is stimulated by high temperature. Under optimal conditions, VCP hydrolyzes ATP with a K(m) of approximately 0.33 mm and a V(max) of approximately 0.52 nmol P(i) min(-1) microg(-1). At a physiological temperature, mutation in D2 significantly inhibits the ATPase activity, while that in D1 has little effect. Interestingly, mutations in D1, but not D2, abolish the heat-stimulated ATPase activity. Thus, we provide the first demonstration that the ATPase activity of VCP is required for mediating the Ub-Pr degradation, that D2 accounts for the major ATPase activity, and that D1 contributes to the heat-induced activity.