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Bismarck adopted the policy to isolate Austria in the continent to aid in the unification of Germany. In 1863, Bismarck gained an ally in Russia when he aided them in the suppression of the revolt of Poland. He also gained the assurance of neutrality from Napoleon III, the King of France regarding the Austro-Prussian War with the promise to give Belgium or some portions of the Rhine Valley. Along with the support of Italy, he managed to isolate Austria in the field of European Politics. Austria responding to this isolation started creating problems regarding the unification of Germany. She refused to keep Holstein under her control because of its distance from her boundaries and also wanted the return of Schleswig to Denmark. As Austria violated the Convention of Gastein, Bismarck declared war against Austria in 1866. This war was famously known as the Battle of Sadowa and continued for Seven Weeks. It concluded with the defeat of Austria.

The ‘Treaty of Prague’ was concluded between Austria and Prussia on August 23, 1866 following the defeat of Austria. According to this treaty, Schleswig and Holstein were given to Prussia and Austria ceded Venice to Prussia. Austria also had to pay the War- indemnity of � 30,000,00 to Prussia.

After the Treaty of Prague, the formation of Germany started when the states of Schleswig, Holstein, Hanover, Nassaa and Frankfort were annexed to Prussia. The North Germany Confederation was formed when the States north to May River were annexed to Prussia.