With incomplete lineage sorting (ILS), the genealogy of closely related species differs along their genomes. The amount of ILS depends on population parameters such as the ancestral effective population sizes and the recombination rate, but also on the number of generations between speciation events. We use a hidden Markov model parameterized according to coalescent theory to infer the genealogy along a four-species genome alignment of closely related species and estimate population parameters. We analyze a basic, panmictic demographic model and study its properties using an extensive set of coalescent simulations. We assess the effect of the model assumptions and demonstrate that the Markov property provides a good approximation to the ancestral recombination graph. Using a too restricted set of possible genealogies, necessary to reduce the computational load, can bias parameter estimates. We propose a simple correction for this bias and suggest directions for future extensions of the model. We show that the patterns of ILS along a sequence alignment can be recovered efficiently together with the ancestral recombination rate. Finally, we introduce an extension of the basic model that allows for mutation rate heterogeneity and reanalyze human-chimpanzee-gorilla-orangutan alignments, using the new models. We expect that this framework will prove useful for population genomics and provide exciting insights into genome evolution.