A few marine cases have demonstrated morphological and genetic divergence in the absence of spatial barriers to gene flow, suggesting that the initial phase of speciation is possible without geographic isolation. In the Bocas del Toro Archipelago of the Atlantic Coast of Panama, we found two morphotypes of the scleractinian coral Favia fragum with opposing depth distributions. One morphotype fit the classical description of F. fragum and was most abundant at 3 m depth. A second morphotype was distinguished by raised corallites and was restricted to < or = 1 m depth. The two morphotypes overlapped in distribution at 1 m depth. Multivariate analysis of polyp-level characters (shape and distribution of septa within corallites) divided samples into two groups corresponding to initial qualitative observations of colony shape and corallite relief. To determine whether reduced gene flow maintains morphological variation, we measured the frequencies of alleles at five allozyme loci in both morphotypes at three sites 1-2 km distant. While there were significant differences in allele frequencies between morphotypes within sites, there were also frequency differences among sites at most loci, with the exception of nearly fixed alleles at the PGM locus. Extremely low heterozygosity permitted us to use haplotypes to compare genetic distance between morphotypes and among sites. Comparisons between haplotype data and a null model assuming gene flow between morphotypes showed that the two morphotypes shared significantly fewer haplotypes than expected, and average genetic distance between morphotypes was significantly greater than expected. Partitioning haplotype variation with analysis of molecular variance demonstrated that 35% of the variation was explained by morphotype, whereas 28% of the variation was explained by site. Two PGM heterozygotes and several individuals homozygous for rare PGM alleles are consistent with hybridization, and perhaps introgression by selfing within morphotypes. We consider three hypotheses for this morphological and genetic divergence in F. fragum: (1) intraspecific polymorphism, (2) incipient species, (3) biological species; and discuss the role of reproductive characters in a divergence-with-gene flow mechanism of speciation.