Bypassing of DNA lesions by damage-tolerant DNA polymerases depends on the interaction of these enzymes with the monoubiquitylated form of the replicative clamp protein, PCNA. We have analyzed the contributions of ubiquitin and PCNA binding to damage bypass and damage-induced mutagenesis in Polymerase η (encoded by RAD30) from the budding yeast Saccharomyces cerevisiae. We report here that a ubiquitin-binding domain provides enhanced affinity for the ubiquitylated form of PCNA and is essential for in vivo function of the polymerase, but only in conjunction with a basal affinity for the unmodified clamp, mediated by a conserved PCNA interaction motif. We show that enhancement of the interaction and function in damage tolerance does not depend on the ubiquitin attachment site within PCNA. Like its mammalian homolog, budding yeast Polymerase η itself is ubiquitylated in a manner dependent on its ubiquitin-binding domain.