Despite unprecedented efforts, our therapeutic arsenal against SARS-CoV-2 remains limited. The conserved macrodomain 1 (Mac1) in NSP3 is an enzyme exhibiting ADP-ribosylhydrolase activity and a possible drug target. To determine the therapeutic potential of Mac1 inhibition, we generated recombinant viruses and replicons encoding a catalytically inactive NSP3 Mac1 domain by mutating a critical asparagine in the active site. While substitution to alanine (N40A) reduced catalytic activity by ~10-fold, mutations to aspartic acid (N40D) reduced activity by ~100-fold relative to wildtype. Importantly, the N40A mutation rendered Mac1 unstable in vitro and lowered expression levels in bacterial and mammalian cells. When incorporated into SARS-CoV-2 molecular clones, the N40D mutant only modestly affected viral fitness in immortalized cell lines, but reduced viral replication in human airway organoids by 10-fold. In mice, N40D replicated at >1000-fold lower levels compared to the wildtype virus while inducing a robust interferon response; all animals infected with the mutant virus survived infection and showed no signs of lung pathology. Our data validate the SARS-CoV-2 NSP3 Mac1 domain as a critical viral pathogenesis factor and a promising target to develop antivirals.