We investigate a phase separation instability that occurs in a system of nearly elastically colliding hard spheres driven by a thermal wall. If the aspect ratio of the confining box exceeds a threshold value, granular hydrostatics predict phase separation: the formation of a high-density region coexisting with a low-density region along the wall that is opposite to the thermal wall. Event-driven molecular dynamics simulations confirm this prediction. The theoretical bifurcation curve agrees with the simulations quantitatively well below and well above the threshold. However, in a wide region of aspect ratios around the threshold, the system is dominated by fluctuations, and the hydrostatic theory breaks down. Two possible scenarios of the origin of the giant fluctuations are discussed.