Otto was born in the Austrian capital, Vienna, the youngest son of King Albert I of Germany and Elizabeth of Carinthia, a member of the House of Gorizia-Tyrol (Meinhardiner).

After the murder of King Albert I in 1308, the Habsburgs lost out in the struggle for the German throne, when Frederick the Fair was defeated by his Wittelsbach rival Louis in the 1322 Battle of Mühldorf.

In 1327 he founded Neuberg Abbey in Styria, on the occasion of the birth of his first son Frederick II, and the Chapel of Saint George in the Augustinian Church in Vienna.

In February he developed close ties with the mighty House of Luxembourg by secondly marrying Anna of Bohemia, daughter of King John the Blind and sister of future emperor Charles IV, in the Moravian royal city of Znojmo.

Otto was enthroned as duke in accordance with the archaic Carantanian rite on the Zollfeld plain, and, from that time onwards, took care of Carinthia rather than of the Austrian duchy.