The evolutionary success of bacteria depends greatly on their capacity to continually generate phenotypic diversity. Structured environments are particularly favorable for diversification because of attenuated clonal interference, which renders selective sweeps nearly impossible and enhances opportunities for adaptive radiation. We examined at the microscale level the emergence and the spatial and temporal dynamics of phenotypic diversity and their underlying causes in Escherichia coli colonies. An important dynamic heterogeneity in the growth, metabolic activity, morphology, gene expression patterns, stress response induction, and death patterns among cells within colonies was observed. Genetic analysis indicated that the phenotypic variation resulted mostly from mutations and that indole production, oxidative stress, and the RpoS-regulated general stress response played an important role in the generation of diversity. We observed the emergence and persistence of phenotypic variants within single colonies that exhibited variable fitness compared to the parental strain. Some variants showed improved capacity to produce biofilms, whereas others were able to use different nutrients or to tolerate antibiotics or oxidative stress. Taken together, our data show that bacterial colonies provide an ecological opportunity for the generation and maintenance of vast phenotypic diversity, which may increase the probability of population survival in unpredictable environments.