Sex chromosomes are generally morphologically and functionally distinct, but the evolutionary forces that cause this differentiation are poorly understood. Drosophila americana americana was used in this study to examine one aspect of sex chromosome evolution, the degeneration of nonrecombining Y chromosomes. The primary X chromosome of D. a. americana is fused with a chromosomal element that was ancestrally an autosome, causing this homologous chromosomal pair to segregate with the sex chromosomes. Sequence variation at the Alcohol Dehydrogenase (Adh) gene was used to determine the pattern of nucleotide variation on the neo-sex chromosomes in natural populations. Sequences of Adh were obtained for neo-X and neo-Y chromosomes of D. a. americana, and for Adh of D. a. texana, in which it is autosomal. No significant sequence differentiation is present between the neo-X and neo-Y chromosomes of D. a. americana or the autosomes of D. a. texana. There is a significantly lower level of sequence diversity on the neo-Y chromosome relative to the neo-X in D. a. americana. This reduction in variability on the neo-Y does not appear to have resulted from a selective sweep. Coalescent simulations of the evolutionary transition of an autosome into a Y chromosome indicate there may be a low level of recombination between the neo-X and neo-Y alleles of Adh and that the effective population size of this chromosome may have been reduced below the expected value of 25% of the autosomal effective size, possibly because of the effects of background selection or sexual selection.