Mobile genetic elements have impacted biological evolution across all studied organisms, but evidence for a role in evolutionary emergence of an entire phylogenetic clade has not been forthcoming. We suggest that mobile element predation played a formative role in emergence of the phytoplasma clade. Phytoplasmas are cell wall-less bacteria that cause numerous diseases in plants. Phylogenetic analyses indicate that these transkingdom parasites descended from Gram-positive walled bacteria, but events giving rise to the first phytoplasma have remained unknown. Previously we discovered a unique feature of phytoplasmal genome architecture, genes clustered in sequence-variable mosaics (SVMs), and suggested that such structures formed through recurrent, targeted attacks by mobile elements. In the present study, we discovered that cryptic prophage remnants, originating from phages in the order Caudovirales, formed SVMs and comprised exceptionally large percentages of the chromosomes of ‘Candidatus Phytoplasma asteris’-related strains OYM and AYWB, occupying nearly all major nonsyntenic sections, and accounting for most of the size difference between the two genomes. The clustered phage remnants formed genomic islands exhibiting distinct DNA physical signatures, such as dinucleotide relative abundance and codon position GC values. Phytoplasma strain-specific genes identified as phage morons were located in hypervariable regions within individual SVMs, indicating that prophage remnants played important roles in generating phytoplasma genetic diversity. Because no SVM-like structures could be identified in genomes of ancestral relatives including Acholeplasma spp., we hypothesize that ancient phage attacks leading to SVM formation occurred after divergence of phytoplasmas from acholeplasmas, triggering evolution of the phytoplasma clade.