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 the course of a rapprochement of both dynasties, Otto married Elizabeth of Wittelsbach, a daughter of Duke Stephen I of Bavaria. 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. When his wife Elizabeth died in 1330, she was buried at the Neuberg Abbey church.
Two months later, Otto's maternal uncle, the Meinhardiner duke Henry of Carinthia, died without male heirs, whereupon Emperor Louis IV on 2 May 1335 ceded the Duchy of Carinthia, the adjacent March of Carniola and the southern part of the Tyrol to Otto and Albert as Imperial fiefs in Linz. 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. In 1337 he founded the knightly orderSocietas Templois for the crusade against the pagan Prussian and Lithuanian tribes. His nickname "the Merry" refers to the festive atmosphere at his court.
Otto died at Neuberg Abbey at the age of 37. His sons and titular successors Frederick II and Leopold II died shortly afterwards in 1344 (presumably poisoned), and the line became extinct.
Elizabeth of Bavaria died on 25 March 1330. Otto remained a widower for almost five years. On 16 February 1335, Otto married his second wife Anna of Luxembourg, daughter of King John of Bohemia and his first wife Elizabeth, a member of the Přemyslid dynasty. They had no children. Anna died on 3 September 1338.
Otto also had four illegitimate sons who appear in genealogies. The identities of their mother or mothers and their later fates are unknown:
