BACKGROUND: Sequencing of environmental DNA (often called metagenomics) has shown tremendous potential to uncover the vast number of unknown microbes that cannot be cultured and sequenced by traditional methods. Because the output from metagenomic sequencing is a large set of reads of unknown origin, clustering reads together that were sequenced from the same species is a crucial analysis step. Many effective approaches to this task rely on sequenced genomes in public databases, but these genomes are a highly biased sample that is not necessarily representative of environments interesting to many metagenomics projects. RESULTS: We present SCIMM (Sequence Clustering with Interpolated Markov Models), an unsupervised sequence clustering method. SCIMM achieves greater clustering accuracy than previous unsupervised approaches. We examine the limitations of unsupervised learning on complex datasets, and suggest a hybrid of SCIMM and supervised learning method Phymm called PHYSCIMM that performs better when evolutionarily close training genomes are available. CONCLUSIONS: SCIMM and PHYSCIMM are highly accurate methods to cluster metagenomic sequences. SCIMM operates entirely unsupervised, making it ideal for environments containing mostly novel microbes. PHYSCIMM uses supervised learning to improve clustering in environments containing microbial strains from well-characterized genera. SCIMM and PHYSCIMM are available open source from http://www.cbcb.umd.edu/software/scimm.