Causes
For centuries, Central Europe was split into a few large states and hundreds of tiny entities, each jealously maintaining its independence with the assistance of outside powers, particularly France. Austria, the personal territory of the Habsburg Emperors, was traditionally considered the leader of the German states, but Prussia was becoming increasingly powerful and by the late 18th century was ranked as one of the great powers of Europe. The Holy Roman Empire was formally disbanded in 1806 when the political makeup of Central Europe was re-organised by Napoleon. The German states were drawn into the ambit of the Confederation of the Rhine (Rheinbund) which was forced to submit to French influence until the defeat of the French Emperor. After the Napoleonic Wars had ended in 1815, the German states were once again reorganized into a loose confederation: the German Confederation, under Austrian leadership.
In the meantime, partly in reaction to the triumphant French nationalism of Napoleon I, and partly as an organic feeling of commonality glorified during the romantic era, German nationalism became a potent force during this period. The ultimate aim of most German nationalists was the gathering of all Germans under one state. Two different ideas of national unification eventually came to the fore. One was a "Greater Germany" (Großdeutsche Lösung) that would include all German-speaking lands, including and dominated by the multi-national empire of Austria; the other (preferred by Prussia) was a "Lesser Germany" (Kleindeutsche Lösung) that would exclude even the German parts of Austria and be dominated by Prussia.
The pretext for precipitating the conflict was found in the dispute between Prussia and Austria over the administration of Schleswig-Holstein. When Austria brought the dispute before the German diet and also decided to convene the Holstein diet, Prussia, declaring that the Gastein Convention had thereby been nullified, invaded Holstein. When the German diet responded by voting for a partial mobilization against Prussia, Bismarck declared that the German Confederation was ended.
Read more about this topic: Austro-Prussian War