Some of the most dangerous pathogens such as Mycobacterium tuberculosis and Yersinia pestis evolve clonally. This means that little or no recombination occurs between strains belonging to these species. Paradoxically, while different members of these species show extreme sequence similarity of orthologous genes, some of these species show considerable inter-species phenotypic variation. The source of this phenotypic variation remains elusive. Here we show that despite high levels of sequence similarity, and near complete absence of horizontal gene transfer (HGT), strains from clonal species show levels of gene-content variation that are comparable to those of much more diverged bacterial species that undergo extensive recombination and HGT. We further demonstrate that in contrast to the highly-recombining bacteria in which variation in gene content stems from both gene loss and horizontal gene transfer, high levels of variation in gene content within the clonal species can be almost entirely attributed to prevalent gene-loss. Finally, we demonstrate that the vast majority of genes that are lost within clonal species are maintained within their respective genomes as pseudogenes. Together, we demonstrate that while highly-recombining bacterial species diverge via a combination of gene-sequence diversification, gene-gain and gene-loss, clonal bacteria diversify primarily via gene-loss. Gene loss therefore dominates as a source of genetic variation within clonal bacterial species, and should be taken into account when probing the sources of the extensive phenotypic variation observed within these species.