Although Drosophila melanogaster has been the subject of intensive analysis of polymorphism and divergence, little is known about the distribution of variation at the most distal regions of chromosomes arms. Here we report a survey of genetic variation on the tip of 3L in D. melanogaster and D. simulans. Levels of single nucleotide polymorphism in the most distal euchromatic sequence are approximately one order of magnitude less than that typically observed in genomic regions of normal crossing over, consistent with what might be expected under models of linked selection in regions of low crossing over. However, despite this reduced level of nucleotide variation, we found abundant deletion polymorphism. These deletions create at least three gene presence/absence polymorphisms within D. melanogaster: the putative G-protein coupled receptor mthl-8 (which is the most distal known or predicted gene on 3L) and the unannotated mRNAs AY060886 and BT006009. Strikingly, D. simulans is also segregating deletions that cause mthl8 presence/absence polymorphism. Breakpoint sequencing and tests of correlations with segregating SNPs in D. melanogaster suggest that each deletion is unique. Cloned breakpoint sequences revealed the presence of Het-A elements just distal to unique, canonical euchromatic sequences. This pattern suggests a model in which repeated telomeric deficiencies cause deletions of euchromatic sequence followed by subsequent "healing" by retrotranposition of Het-A elements. These data reveal the dominance of telomeric dynamics on the evolution of closely linked sequences in Drosophila.