Two-dimensional nonequilibrium nematic steady states, as found in agitated granular-rod monolayers or films of orientable amoeboid cells, were predicted [Europhys. Lett. 62 (2003) 196] to have giant number fluctuations, with standard deviation proportional to the mean. We show numerically that the steady state of such systems is macroscopically phase-separated, yet dominated by fluctuations, as in the Das-Barma model [PRL 85 (2000) 1602]. We suggest experimental tests of our findings in granular and living-cell systems. The ordering or "flocking" [1, 2, 3] of self-propelled particles obeys laws strikingly different from those governing thermal equilibrium systems of the same spatial symmetry. Even in two dimensions, the velocities of particles in such flocks show true longrange order [1,2], despite the spontaneous breaking of continuous rotational invariance. Density fluctuations in the ordered phase are anomalously large [2], and the onset of the ordered phase is discontinuous [4]. The ultimate origin of these nonequilibrium phenomena is that the order parameter is not simply an orientation but a macroscopic velocity. It is thus intriguing that even the nematic phase of a collection of self-driven particles, which is apolar and hence has zero macroscopic velocity, shows [5,6] giant number fluctuations [7], as a result of the manner in which orientational fluctuations drive mass currents. This Letter takes a closer look at these fluctuations and shows that they offer a physical realisation of the remarkable nonequilibrium phenomenon known as fluctuation-dominated phase separation [8], hitherto a theoretical curiosity.Before presenting our results, we make precise the term active nematic. An active particle extracts energy from sources in the ambient medium or an internal fuel tank, dissipates it by the cyclical motion of an internal "motor" coordinate, and moves as a consequence. For the anisotropic particles that concern us here, the direction of motion is determined predominantly by the orientation. Our definition encompasses self-propelled organisms, living cells, molecular motors, and macroscopic rods on a vertically vibrated substrate (where the tilt of the rod * Also with CMTU, JNCASR, Bangalore 560064, India † Electronic address: sriram@physics.iisc.ernet.in serves as the motor coordinate). An active nematic is a collection of such particles with axes on average spontaneously aligned in a directionn, with invariance undern → −n. We know of two realisations of active nematics: collections of living amoeboid cells [10] and granular-rod monolayers [11,12]. We study active nematics in a simple numerical model described in detail below. Our results confirm (see Fig. 1) the giant number fluctuations (standard deviation ∝ mean) [6] predicted by the linearised analysis of [5], but are far richer: (i) A statistically uniform initial distribution of particles, on a well-ordered nematic background, undergoes a delicate "fluctuation-dominated" [8] phase separation, where the system explores many statistically simila...