Though references to "otter dogges" in England date back to the 12th century, the breed does not appear to have reached its current form until some time late in the 18th century . Otterhounds were used in packs to hunt river otter, initially as a way to keep otters from destroying a needed food source, and only later as a sport. King John of Magna Carta fame hunted otter with large shaggy dogs, described at that time as a "rough sort of a dog, between a hound and a terrier". Queen Elizabeth I was the first "Lady Master of Otterhounds".

The modern Otterhound is documented to have Bloodhound and several of the rough-coated French hound breeds in his background, as well as the now extinct Southern Hound. Otterhounds and terriers were bred to create the Airedale Terrier.

Otter hunting reached its peak of popularity in the years preceding World War I. At that time there were more than 500 hounds in 24 packs which hunted otter, though most of those dogs were not purebred Otterhounds. Indeed, the hunt packs continued to cross-breed their hounds well into the 20th century to improve hunting abilities. One of the results is that all current purebred Otterhounds pedigrees go back to a Bloodhound/Griffon Nivernais cross done in 1958. A drastic drop in otter population, due to water pollution, caused otter hunting to be banned in England in 1978 and in Scotland 2 years later. The purebred Otterhounds in the remaining packs were dispersed to private owners, with some going to the mink hunting packs.

There are fewer than 1000 Otterhounds world wide, with the largest numbers in the UK and US, and smaller populations in the Netherlands, Scandinavia, Germany, Switzerland, Canada, and New Zealand. Currently it's estimated that there are about 350 Otterhounds in the US and Canada.