Hydra, first described by Anton van Leeuwenhoek in a letter to the Royal Society in 1702, has been studied by biologists for centuries and now is an important model for work on axial patterning, stem cell biology and regeneration. Its genome, over half of which is made up of mobile elements, has now been sequenced, as has the genome of a Curvibacter sp. bacterium stably associated with Hydra magnipapillata. Comparisons of the Hydra genome with those of other animals provide insights into the evolution of epithelia, contractile tissues, developmentally regulated transcription factors, pluripotency genes and the neuromuscular junction, as well as the Spemann–Mangold organizer, the region in the early embryo that establishes the embryo's axis. The freshwater cnidarian Hydra is a significant model for studies of axial patterning, stem cell biology and regeneration. Its (A+T)-rich genome has now been sequenced. Comparison of this genome with those of other animals provides insights into the evolution of epithelia, contractile tissues, developmentally regulated transcription factors, pluripotency genes and more. The freshwater cnidarian Hydra was first described in 17021 and has been the object of study for 300 years. Experimental studies of Hydra between 1736 and 1744 culminated in the discovery of asexual reproduction of an animal by budding, the first description of regeneration in an animal, and successful transplantation of tissue between animals2. Today, Hydra is an important model for studies of axial patterning3, stem cell biology4 and regeneration5. Here we report the genome of Hydra magnipapillata and compare it to the genomes of the anthozoan Nematostella vectensis6 and other animals. The Hydra genome has been shaped by bursts of transposable element expansion, horizontal gene transfer, trans-splicing, and simplification of gene structure and gene content that parallel simplification of the Hydra life cycle. We also report the sequence of the genome of a novel bacterium stably associated with H. magnipapillata. Comparisons of the Hydra genome to the genomes of other animals shed light on the evolution of epithelia, contractile tissues, developmentally regulated transcription factors, the Spemann–Mangold organizer, pluripotency genes and the neuromuscular junction.