Hydractinia symbiolongicarpus, a colonial cnidarian (class Hydrozoa) epibiont on hermit crab shells, is well established as a model for genetic studies of allorecognition. Recently, two linked loci, allorecognition (alr) 1 and alr2, were identified by positional cloning and shown to be major determinants of histocompatibility. Both genes encode putative transmembrane proteins with hypervariable extracellular domains similar to immunoglobulin (Ig)-like domains. We sought to characterize the naturally occurring variation at the alr2 locus and to understand the origins of this molecular diversity. We examined full-length cDNA coding sequences derived from a sample of 21 field-collected colonies, including 18 chosen haphazardly and two laboratory reference strains. Of the 35 alleles recovered from the 18 unbiased samples, 34 encoded unique gene products. We identified two distinct structural classes of alleles that varied over a large central region of the gene but both possessed highly polymorphic extracellular domains I, similar to an Ig-like V-set domain. The discovery of structurally chimeric alleles provided evidence that interallelic recombination may contribute to alr2 variation. Comparisons of the genomic region encompassing alr2 from two field-derived haplotypes and one laboratory reference sequence revealed a history of structural variation at the haplotype level as well. Maintenance of large numbers of equally rare alleles in a natural population is a hallmark of negative frequency-dependent selection and is expected to produce high levels of heterozygosity. The observed alr2 allelic diversity is comparable with that found in immune recognition molecules such as human leukocyte antigens, B cell Igs, or natural killer cell Ig-like receptors.