Clustering categorical sequences remains an open and challenging task due to the lack of an inherently meaningful measure of pair wise similarity between sequences. Model initialization is an unsolved problem in model-based clustering algorithms for categorical sequences. In this paper, we propose a simple and effective Markov model to approximate the conditional probability distribution (CPD) model, and use it to design a novel two-tier Markov model to represent a sequence cluster. Furthermore, we design a novel divisive hierarchical algorithm for clustering categorical sequences based on the two-tier Markov model. The experimental results on the data sets from three different domains demonstrate the promising performance of our models and clustering algorithm.