Background Molecular evolutionary studies in mammals often estimate nucleotide substitution rates within and outside CpG dinucleotides separately. Frequently, in alignments of two sequences, the division of sites into CpG and non-CpG classes is based simply on the presence or absence of a CpG dinucleotide in either sequence, a procedure that we refer to as CpG/non-CpG assignment. Although it likely that this procedure is biased, it is generally assumed that the bias is negligible if species are very closely related. Results Using simulations of DNA sequence evolution we show that assignment of the ancestral CpG state based on the simple presence/absence of the CpG dinucleotide can seriously bias estimates of the substitution rate, because many true non-CpG changes are misassigned as CpG. Paradoxically, this bias is most severe between closely related species, because a minimum of two substitutions are required to misassign a true ancestral CpG site as non-CpG whereas only a single substitution is required to misassign a true ancestral non-CpG site as CpG in a two branch tree. We also show that CpG misassignment bias differentially affects fourfold degenerate and noncoding sites due to differences in base composition such that fourfold degenerate sites can appear to be evolving more slowly than noncoding sites. We demonstrate that the effects predicted by our simulations occur in a real evolutionary setting by comparing substitution rates estimated from human-chimp coding and intronic sequence using CpG/non-CpG assignment with estimates derived from a method that is largely free from bias. Conclusion Our study demonstrates that a common method of assigning sites into CpG and non CpG classes in pairwise alignments is seriously biased and recommends against the adoption of ad hoc methods of ancestral state assignment.