While microbiologists often make the simplifying assumption that genotype determines phenotype in a given environment, it is becoming increasingly apparent that phenotypic heterogeneity (in which one genotype generates multiple phenotypes simultaneously even in a uniform environment) is common in many microbial populations. The importance of phenotypic heterogeneity has been demonstrated in a number of model systems involving binary phenotypic states (e.g., growth/non-growth); however, less is known about systems involving phenotype distributions that are continuous across an environmental gradient, and how those distributions change when the environment changes. Here, we describe a novel instance of phenotypic diversity in tolerance to a metabolic toxin within wild-type populations of Methylobacterium extorquens, a ubiquitous phyllosphere methylotroph capable of growing on the methanol periodically released from plant leaves. The first intermediate in methanol metabolism is formaldehyde, a potent cellular toxin that is lethal in high concentrations. We have found that at moderate concentrations, formaldehyde tolerance in M. extorquens is heterogeneous, with a cell's minimum tolerance level ranging between 0 mM and 8 mM. Tolerant cells have a distinct gene expression profile from non-tolerant cells. This form of heterogeneity is continuous in terms of threshold (the formaldehyde concentration where growth ceases), yet binary in outcome (at a given formaldehyde concentration, cells either grow normally or die, with no intermediate phenotype), and it is not associated with any detectable genetic mutations. Moreover, tolerance distributions within the population are dynamic, changing over time in response to growth conditions. We characterized this phenomenon using bulk liquid culture experiments, colony growth tracking, flow cytometry, single-cell time-lapse microscopy, transcriptomics, and genome resequencing. Finally, we used mathematical modeling to better understand the processes by which cells change phenotype, and found evidence for both stochastic, bidirectional phenotypic diversification and responsive, directed phenotypic shifts, depending on the growth substrate and the presence of toxin.