Studies of domestic animals are performed on breeds, but a breed does not necessarily equate to a genetically defined population. The division of sheep from three native and four modern Baltic sheep breeds was studied using 21 microsatellite loci and applying a Bayesian clustering method. A traditional breed-wise approach was compared to that relying on the pattern of molecular diversity. In this study, a breed was found to be inconsistent with a distinct genetic population for three reasons: (i) a lack of differentiation between modern Baltic breeds, since the majority of the studied sheep formed a single population; (ii) the presence of individuals of foreign ancestry within the breed; and (iii) an undefined local Saaremaa sheep was referred to as a breed, but was shown to consist of separate populations. In the breed-wise approach, only the clearly distinct Ruhnu sheep demonstrated low within-breed variation, although the newly identified Saaremaa populations also have low variability. Providing adequate management recommendations for the Saaremaa sheep is not possible without further studies, but the potential harmful effects of inbreeding in the Ruhnu sheep could be reduced through the use of two genetically related Saaremaa populations. In other breeds, excessive crossing appears to be a larger concern than inbreeding. Assigning individuals into populations based on the pattern of genetic diversity offers potentially unbiased means of elucidating the genetic population structure of species. Combining these genetic populations with phenotypic and aetiological data will enable formulation of the most informed recommendations for gene resource management.