World War I ended in defeat for Austria-Hungary and its allies. It also marked the end of the Hapsburg empire. In the final months of the war, the various national groups set up independent governments. When an armistice was signed on November 11, 1918, only the German-speaking provinces at the heart of the empire were left to Austria. On that day Charles, who had become emperor after Francis Joseph's death in 1916, vacated the throne, and Austria became a republic. The treaties ending the war established the non-German-speaking areas as independent nations to be permanently separated from Austria.

The new republic faced terrible problems. Its trade was ruined, its money worthless, and its people starving. Most Austrians wanted an Anschluss (union) with Germany to improve Austria's economic situation. However, the nations that had won the war refused to allow a union that might contribute to a rebirth of German power.

Within the republic of Austria two political parties developed—the Social Democrats and the Christian Socialists. In general, the Social Democrats were supported by the labor unions and the people of Vienna, while the Christian Socialists were supported by the peasants and the Roman Catholic Church. The two parties were violently antagonistic; each at times tried by unscrupulous methods to destroy the other. By 1932, however, the leaders of both parties agreed to oppose the National Socialist (Nazi) movement, which Adolf Hitler was attempting to introduce from Germany into Austria.

In 1932 the Christian Socialist Engelbert Dollfuss became chancellor. Despite the opposition to Nazism by the country's political leaders, sympathy for Hitler—who was Austrian-born and who espoused Anschluss —was growing rapidly among the Austrian people. Fearing that the Nazi movement would overturn the government, Dollfuss in 1933 suspended the constitution and dissolved all political parties, making himself dictator.

Dollfuss was assassinated in 1934 by Austrian Nazis. Kurt von Schuschnigg took his place as chancellor and dictator and was able temporarily to withstand German pressure for Anschluss , but in 1938 he was forced to give in to Hitler. When World War II began in 1939, Austria fought as an integral part of Germany.