Phase-variation of Type I restriction-modification systems can rapidly alter the sequence motifs they target, diversifying both the epigenetic patterns and endonuclease activity within clonally descended populations. Here, we characterize the Streptococcus pneumoniae SpnIV phase-variable Type I RMS, encoded by the translocating variable restriction (tvr) locus, to identify its target motifs, mechanism and regulation of phase variation, and effects on exchange of sequence through transformation. The specificity-determining hsdS genes were shuffled through a recombinase-mediated excision-reintegration mechanism involving circular intermediate molecules, guided by two types of direct repeat. The rate of rearrangements was limited by an attenuator and toxin-antitoxin system homologs that inhibited recombinase gene transcription. Target motifs for both the SpnIV, and multiple Type II, MTases were identified through methylation-sensitive sequencing of a panel of recombinase-null mutants. This demonstrated the species-wide diversity observed at the tvr locus can likely specify nine different methylation patterns. This will reduce sequence exchange in this diverse species, as the native form of the SpnIV RMS was demonstrated to inhibit the acquisition of genomic islands by transformation. Hence the tvr locus can drive variation in genome methylation both within and between strains, and limits the genomic plasticity of S. pneumoniae.