Viruses, as opportunistic intracellular parasites, hijack the cellular machinery of host cells to support their survival and propagation. Consequently, numerous viral proteins are subjected to host-mediated post-translational modifications. Here, we demonstrate that the SARS-CoV-2 nucleocapsid protein (SARS2-NP) is modified by a small ubiquitin-like modifier (SUMO) on the lysine 65 residue. SARS2-NP SUMOylation is essential for executing efficiently SARS2-NP’s ability in homo-oligomerization, RNA association, liquid-liquid phase separation (LLPS), thereby the innate antiviral immune response is suppressed robustly both in vitro and in vivo. These roles played by SARS2-NP SUMOylation can be achieved through intermolecular association between SUMO conjugation and a newly identified SUMO-interacting motif (SIM) in SARS2-NP. Importantly, the widespread SARS2-NP R203K mutation in SARS-CoV-2 variants gains a novel site of SUMOylation which further increases SARS2-NP’s LLPS and immunosuppression. Notably, we discover that the SUMO E3 ligase TRIM28 is responsible for catalyzing SARS2-NP SUMOylation. An interfering peptide targeting the TRIM28 and SARS2-NP interaction was screened out to block SARS2-NP SUMOylation and LLPS, and consequently inhibit SARS-CoV-2 replication and rescue innate antiviral immunity. Collectively, these data support SARS2-NP SUMOylation as an essential modification for SARS-CoV-2 virulence, and therefore provide a strategy to antagonize SARS-CoV-2.