The effects of terrestrial habitat islands on gene flow and genetic diversity in animal populations have been predicted and discussed in theoretical terms, but empirical data are needed to test these predictions and provide an understanding of the relationships of life-history characteristics to genetics of insular species. We studied saxicolous mice (Phyllotis xanthopygus) in Patagonia to explore genetic structure, phylogeography, and gene flow in a species inhabiting natural habitat islands. Phylogeographic analyses based on mtDNA sequences revealed two haplotype clades, which presumably reflect early Pleistocene factors that temporarily separated the mice into two geographically isolated groups. The Río Chubut, which lies within a glacial drainage basin bisecting northern Patagonia, might have affected gene flow in the species. Although we anticipated isolation by distance and founder phenomena associated with habitat islands, in some habitat patches we found evidence of high local genetic diversity. The amount of divergence in the mitochondrial cytochrome b gene (≈ 3.4%) in animals at a single locality could best be explained through a combination of historical factors and metapopulation source–sink theory. Demographic shifts, dispersal, and episodic recolonization are important in the life history and genetic population structure of P. xanthopygus.