Many islands are characterized by high biological diversity, and both adaptive and non-adaptive factors have been found to contribute to island richness. Here we study extensive color morph variability in the allopolyploid peat moss Sphagnum palustre on the Azores Islands. By comparing genetic diversity patterns in island and mainland populations we evaluate various hypotheses for the high diversity observed within and between islands. We conclude that the diversity observed cannot be explained by Azores Islands having acted as refugia for morphotypes during Pleistocene glacial periods. Furthermore, high island diversity is not the result of past or ongoing adaptive radiations. Lack of genetic differentiation and free reproduction among morphs growing closely together is not consistent with adaptive differentiation in space or time to changing environmental conditions. We conclude that high island diversity in this species likely reflects phenotypic plasticity, possibly in response to unfavourable microenvironmental conditions. Evolution of phenotypic plasticity is expected in organisms with extensive gene flow, and island diversity in the highly dispersive S. palustre is probably the result of either higher environmental variability in island than mainland populations, or perhaps more likely, selection for increased plasticity in colonizers of variable and stressful island environments.