Murray Valley encephalitis virus (MVEV) is the most important cause of mosquito-borne viral encephalitis in humans in Australia. The re-emergence of MVEV in southeast Australia in 2011 renewed concerns about its potential to spread and cause disease. We undertook phylogenetic studies to better understand the genetic relationships between earlier and more recent circulating strains, patterns of virus movement and virus evolution. Of the four recognized genotypes, only G1 and G2 were found to be contemporary. G1 viruses were dominant over the sampling period and found across the known geographic range of MVEV. Two distinct sub-lineages of G1 were observed (1A and 1B). G1B strains have been isolated from across mainland Australia, while G1A strains have been detected in northwest Australia and Papua New Guinea. G2 is comprised of only Western Australian isolates, suggesting it is geographically or ecologically restricted. To address the basis of this restriction, pathogenicity of representative strains from G1 and G2 were tested using a mouse model. Whereas, G1 virus strains were neuroinvasive, G2 viruses were attenuated, suggesting the latter may be poorly pathogenic for vertebrate hosts. Low levels of genetic diversity in virus populations have been associated with reduced fitness. Deep sequencing of the virus envelope gene from extracts of infected mosquitoes collected in the field revealed that the level of nucleotide variation of G2 viruses was 10 to 100-fold lower compared to G1 viruses. Similarly, phylogenetic analysis indicated that G2 virus populations were genetically more homogeneous (lower levels of clonal diversity) than G1 viruses. Taken together, these results suggest that the lower levels of genetic diversity observed in G2 virus populations and their attenuated phenotype restrict their transmission and spread. The results of this study provides new insights into the genetic diversity and evolution of MVEV. The demonstration of co-circulation of all contemporary genetic lineages of MVEV in northwestern Australia, supports the contention that this region is the enzootic focus for this virus.