The accurate delimitation of species boundaries in nonbilaterian marine taxa is notoriously difficult, with consequences for many studies in ecology and evolution. Anthozoans are a diverse group of key structural organisms worldwide, but the lack of reliable morphological characters and informative genetic markers hampers our ability to understand species diversification. We investigated population differentiation and species limits in Atlantic (Iberian Peninsula) and Mediterranean lineages of the octocoral genus Paramuricea previously identified as P. clavata. We used a diverse set of molecular markers (microsatellites, RNA-seq derived single-copy orthologues [SCO] and mt-mutS [mitochondrial barcode]) at 49 locations. Clear segregation of Atlantic and Mediterranean lineages was found with all markers. Species-tree estimations based on SCO strongly supported these two clades as distinct, recently diverged sister species with incomplete lineage sorting, P. cf. grayi and P. clavata, respectively. Furthermore, a second putative (or ongoing) speciation event was detected in the Atlantic between two P. cf. grayi color morphotypes (yellow and purple) using SCO and supported by microsatellites. While segregating P. cf. grayi lineages showed considerable geographic structure, dominating circalittoral communities in southern (yellow) and western (purple) Portugal, their occurrence in sympatry at some localities suggests a degree of reproductive isolation. Overall, our results show that previous molecular and morphological studies have underestimated species diversity in Paramuricea occurring in the Iberian Peninsula, which has important implications for conservation planning. Finally, our findings validate the usefulness of phylotranscriptomics for resolving evolutionary relationships in octocorals.