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Looking at the wikipedia articles, they seemed to be winning (the Battle of Custoza and the naval battle of Lissa), and the war against Prussia was already finished. So why did it still cede Venetia to Italy?

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One answer is the battle of Koeniggratz, against Bismarck's Prussia, which Austria-Hungary lost.

Bismarck looked for allies in his war against Austria-Hungary, and found a ready "taker" in Italy, who wanted Venezia, and had previously been allied with France (and gotten Lombardy out of the bargain). The Italian participation occupied enough of the Austrian army to enable Prussia to beat Austria-Hungary further north.

Austria-Hungary then sued for peace, with France's Napoleon III as mediator. Up to that time, France had seen the Hapsburgs as their main rival in European affairs, and therefore mediated against Austria-Hungary, and in favor of Italy. (Austria-Hungary surrendered Venetia to France, who returned it to the newly-emerging Italian state, a move that was supported by Prussia.)

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wasn't Austria already at peace with Prussia at that time? –  Louis Rhys Dec 10 '11 at 4:38
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@LouisRhys: I'd call it a "cease fire," rather than a peace. But one of the terms that Bismarck imposed was French mediation. That was part of his plan to have Napoleon III get on the "wrong side" of Austria, so that when Prussia fought France later, Austria would be friendly to Prussia or at least neutral. –  Tom Au Dec 10 '11 at 20:06
    
another question, why did Austria surrender it to France instead of directly to Italy? –  Louis Rhys Dec 31 '12 at 6:51
    
@LouisRhys: It was a "face saving" move, so that Austria wouldn't be humiliated by Italy, which it had defeated. So Austria surrendered it to the French "mediator," who handed it over to Italy, and Austria "got mad" at France, rather than Germany or Italy. –  Tom Au Mar 14 '13 at 21:17
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