Large-scale evaluations of genetic diversity in domestic livestock populations are necessary so that region-specific conservation measures can be implemented. We performed the first such survey in European sheep by analysing 820 individuals from 29 geographically and phenotypically diverse breeds and a closely related wild species at 23 microsatellite loci. In contrast to most other domestic species, we found evidence of widespread heterozygote deficit within breeds, even after removing loci with potentially high frequency of null alleles. This is most likely due to subdivision among flocks (Wahlund effect) and use of a small number of rams for breeding. Levels of heterozygosity were slightly higher in southern than in northern breeds, consistent with declining diversity with distance from the Near Eastern centre of domestication. Our results highlight the importance of isolation in terms of both geography and management in augmenting genetic differentiation through genetic drift, with isolated northern European breeds showing the greatest divergence and hence being obvious targets for conservation. Finally, using a Bayesian cluster analysis, we uncovered evidence of admixture between breeds, which has important implications for breed management.