This work investigates phase separation of a monodisperse gas of inelastically colliding hard disks confined in a two-dimensional annulus, the inner circle of which represents a "thermal wall." When described by granular hydrodynamic equations, the basic steady state of this system is an azimuthally symmetric state of increased particle density at the exterior circle of the annulus. When the inelastic energy loss is sufficiently large, hydrodynamics predicts spontaneous symmetry breaking of the annular state, analogous to the van der Waals-like phase separation phenomenon previously found in a driven granular gas in rectangular geometry. At a fixed aspect ratio of the annulus, the phase separation involves a "spinodal interval" of particle area fractions, where the gas has negative compressibility in the azimuthal direction. The heat conduction in the azimuthal direction tends to suppress the instability, as corroborated by a marginal stability analysis of the basic steady state with respect to small perturbations. To test and complement our theoretical predictions we performed event-driven molecular dynamics (MD) simulations of this system. We clearly identify the transition to phase separated states in the MD simulations, despite large fluctuations present, by measuring the probability distribution of the amplitude of the fundamental Fourier mode of the azimuthal spectrum of the particle density. We find that the instability region, predicted from hydrodynamics, is always located within the phase separation region observed in the MD simulations. This implies the presence of a binodal (coexistence) region, where the annular state is metastable. The phase separation persists when the driving and elastic walls are interchanged, and also when the elastic wall is replaced by weakly inelastic one.