"Diplomacy without arms is like a concert without a score." - Frederick II the Great
March, 1866: Prussia and Austria, the two most dominant German states as well as long time rivals, start to dispute over the settling of the duchies of Schleswig and Holstein. Earlier, when Prussia and Austria gained control of these duchies, it was agreed that Austria would control Holstein while Prussia controlled Schleswig. Otto von Bismarck, the Minister President of Prussia, announces that Austria has betrayed the agreement. Emperor Franz Joseph of Austria decides to take the matter to the Federal Diet - which breaks the deal that the two nations made, as they agreed to leave the German Federation out of it. King Wilhelm I is said to have had tears in his eyes at this betrayal of good faith. He begins to align himself with Bismarck's goals.
At the Diet, the feud climaxes beyond two duchies. Bismarck calls for a reorganization of the entire Federation and it's conduct.
April, 1866: In the past Bismarck had made a war alliance against Austria with the Kingdom of Italy, and now that alliance was falling apart. Franz Joseph had gotten wind of the Italian plans, and now was determined to keep their southern neighbor neutral. In order to do that, Austria promises to give Italy the province of Venetia, something the Italians had wanted to steal from the Empire for quite some time. While King Emmanuel continues to promise to aid Prussia, secretly negotiations begin with Austria.
May, 1866: The Neutral Powers (Russia, France and England) jointly call for a conference with Italy, Prussia and Austria and begin talks with both parties. Privately the Emperor of France prepares to join Prussia against Austria, as long as they get Rhenish land afterwards; Bismarck dodges the demand. Emperor Franz of Austria accepts the congress on the grounds that the balance of power is not changed, and in the end refuses to join. Austria takes the matter of the two duchies to the Federal Diet. Prussia declares that the agreement of the duchies is null and void, and invades Holstein. Austrian troops withdraw and retreat into Hanover.
June, 1866: All diplomatic relations between Austria and Prussia are broken off. Bismarck announces to the other northern German states that they must stop raising their armies, and accept Prussia's reforms of the Federation. When he is denied, Prussian armies are mobilized and invade the territories. The war officially begins; on the Prussian side are the petty northern states; most of the Federation joins on the Austrian side. Prussia begins invading the states that did not join; Hesse-Camel and Saxony are full on victories. However, the farther south they come, the harder the battles are. The Austrian army, having made a deal with the Italians over Venetia, are unhindered and fully capable to march north; Prussian luck and morale begins to falter.
July, 1866: While Prussia had a strong start in June, the war quickly goes sour for them in July. Saxony, Hesse-Camel, Hanover are all liberated by Austria. Silesia is occupied by Austrian troops, and Weimar (one of Prussia's allies) surrenders. King Wilheim is said to have berated Bismarck, blaming him for underestimating the Austrians. On July 1st, he writes to the Emperor, asking him for peace, although the letter is intercepted by Bismarck and thrown into the fire. The war continues, and the Prussian army begins to fall back, defending Brandenburg and Posen. Within a week, Berlin is overran by the Austrian, and Wilheim surrenders. The Emperor of Austria claims victory, and Austria's dominance of the German states is solidified.
August, 1866: The Federal Diet assembles, in order to decide how best to punish Prussia. Their conquests in Saxony and Hesse-Camel are snatched away, as well as Schelswig and Holstein. Austria takes Brandenburg as their main prize, and the Prussian government is kicked out of Berlin. King Wilheim does not protest; he is humbled. The royal family moves back to Konigsberg, which is re-established as the Prussian capital. The provinces of Pomerania, Posen, and Silesia are left in Prussian hands. As for Bismarck, King Wilheim manages to shift the blame of the war to him - he becomes known as the con man who manipulated the King. Franz Joseph publicly accepts this, although it is said his hatred for the Hohenzollern family was only matched by his want of stability. Bismarck is charged with treason, and executed in Berlin publicly. The Prussian goal of dominating Germany dies, and the Hohenzollerns isolate their Kingdom from the rest of Germany. Not that they had much of a choice, of course; their main punishment for the war was the denial of their right to join the German Federation. Bismarck's dream of a Prussian Germany died, and Austrian influence over Germany did not falter. It is said this action saved Prussia, however, as they escaped the great war over the Rhineland with France that was to come.