Biological modularity enhances evolutionary adaptability. This principle is vividly exemplified by bacterial viruses (phages), which display extensive genomic modularity. Phage genomes are composed of independent functional modules that evolve separately and recombine in various configurations. While genomic modularity in phages has been extensively studied, less attention has been paid to protein modularity—proteins consisting of distinct building blocks that can evolve and recombine, enhancing functional and genetic diversity. Here, we use a set of 133,574 representative phage proteins and highly sensitive homology detection to capture instances of domain mosaicism, defined as fragment sharing between two otherwise unrelated proteins, and to understand its relationship with functional diversity in phage genomes. We discover that unrelated proteins from diverse functional classes frequently share homologous domains. This phenomenon is particularly pronounced within receptor-binding proteins, endolysins, and DNA polymerases. We also identify multiple instances of recent diversification via domain shuffling in receptor-binding proteins, neck passage structures, endolysins and some members of the core replication machinery, often transcending distant taxonomic and ecological boundaries. Our findings suggest that ongoing diversification via domain shuffling is reflective of a co-evolutionary arms race, driven by the need to overcome various bacterial resistance mechanisms against phages.