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Her first major film appearance was in the 1986 film Emma's War, in which she played a teenager who moves to Australia's bush country during World War II. In 1996, director Shirley Barrett cast Otto as a shy waitress in the film Love Serenade. She starred in the 1997 films Doing Time for Patsy Cline and The Well, for which earned her third Australian Film Institute nomination. Her next project was the romantic comedy Dead Letter Office (1998). The film was Otto's first with her father, Barry, who makes a brief appearance. Later that year, she starred in the film In the Winter Dark, directed by James Bogle, for which she was nominated for her fourth Australian Film Institute Award.

After a decade of critically acclaimed roles in Australian films, she gained Hollywood's attention after appearing in supporting roles in The Thin Red Line (1998) and What Lies Beneath (2000). In 2001, she was cast as a naturalist in the comedy Human Nature and appeared in the BBC adaptation of Anthony Trollope's The Way We Live Now, as a strong-willed American Southerner. Her breakthrough role came in 2002, when she portrayed Éowyn in The Lord of the Rings trilogy. Her character was introduced in the trilogy's second film The Lord of the Rings: The Two Towers in 2002 and appeared in the third film, The Lord of the Rings: The Return of the King, the following year. Her performance earned her an Academy of Science Fiction, Fantasy & Horror Films nomination for Best Supporting Actress.

Director Steven Spielberg, impressed by Otto's performance in The Lord of the Rings, called her to ask if she would play opposite Tom Cruise in the big-budget science fiction film War of the Worlds (2005). Otto, pregnant at the time, believed she would have to turn down the role, but the script was reworked to accommodate her.

Her next project was playing the lead in the Australian film Danny Deckchair (2003). She then took on the Australian television miniseries Through My Eyes: The Lindy Chamberlain Story (2004). At the 2005 Logie Awards, Otto won Most Outstanding Actress in a Drama Series for her role.

In 2007, Otto starred as Cricket Stewart, the wife of a successful director, in the television miniseries The Starter Wife. She had a starring role in the 2008 American television series Cashmere Mafia, and Australian films such as In Her Skin and Blessed (2009). She starred opposite Stephanie Sigman and Anthony LaPaglia in the horror prequel Annabelle: Creation. She portrayed Zelda Spellman in Netflix's Chilling Adventures of Sabrina (2018-2020).

She made her theatrical debut in the 1986 production of The Bitter Tears of Petra Von Kant for the Sydney Theatre Company.[28] Three more theatrical productions for the Sydney Theatre Company followed in the late 1980s and early 1990s. In 2002, she returned to the stage playing Nora Helmer in A Doll's House opposite her future husband Peter O'Brien. Otto's performance earned her a 2003 Helpmann Award nomination and the MO Award for "Best Female Actor in a Play". Her next stage role was in the psychological thriller Boy Gets Girl (2005).