Fatal exudative dermatitis (FED) is a significant cause of death of red squirrels (Sciurus vulgaris) on the island of Jersey in the Channel Islands where it is associated with a virulent clone of Staphylococcus aureus, ST49. S. aureus ST49 has been found in other hosts such as small mammals, pigs and humans, but the dynamics of carriage and disease of this clone, or any other lineage in red squirrels, is currently unknown. We used whole-genome sequencing to characterize 228 isolates from healthy red squirrels on Jersey, the Isle of Arran (Scotland) and Brownsea Island (England), from red squirrels showing signs of FED on Jersey and the Isle of Wight (England) and a small number of isolates from other hosts. S. aureus was frequently carried by red squirrels on the Isle of Arran with strains typically associated with small ruminants predominating. For the Brownsea carriage, S. aureus was less frequent and involved strains associated with birds, small ruminants and humans, while for the Jersey carriage S. aureus was rare but ST49 predominated in diseased squirrels. By combining our data with publicly available sequences, we show that the S. aureus carriage in red squirrels largely reflects frequent but facile acquisitions of strains carried by other hosts sharing their habitat (‘spillover’), possibly including, in the case of ST188, humans. Genome-wide association analysis of the ruminant lineage ST133 revealed variants in a small number of mostly bacterial-cell-membrane-associated genes that were statistically associated with squirrel isolates from the Isle of Arran, raising the possibility of specific adaptation to red squirrels in this lineage. In contrast there is little evidence that ST49 is a common carriage isolate of red squirrels and infection from reservoir hosts such as bank voles or rats, is likely to be driving the emergence of FED in red squirrels.