A lottery is a drawing of lots, and a lot was once a real object. In Old English a hlot was the thing used to decide someone's share, often a chip of wood with a name on it. The phrases "cast lots" and "draw lots" preserve the practice.
The same Germanic word spread across Europe. German still has it as Los. Italian borrowed it as lotto, "lot, portion, share," and built lotteria from it. English took lottery from the Italian in the 1560s. French went another route, taking loterie from Middle Dutch loterje. Where the Germanic word itself came from is unknown.
The English word arrived at almost exactly the moment England needed it. On 23 August 1567, Elizabeth I issued a proclamation for "A very rich Lotterie generall, without any Blanckes." The money was for "the reparation of the havens and the strength of the realme." New taxes were not an option, since Parliament approved them only in real crises. The crown hoped to raise £100,000.
On paper the terms were generous. There were 400,000 tickets at ten shillings each, and a top prize of £5,000 paid partly in cash and partly in plate, tapestry and linen. People who travelled to the larger towns to buy tickets were promised seven days' freedom from arrest. Murder, piracy and treason were excluded.
It did not go well. Ten shillings was too much for ordinary people, and fewer than 34,000 tickets sold. The draw, first set for June 1568, was put off again and again. It finally began on 11 January 1569, in a timber lottery house built near the west door of old St Paul's Cathedral. It ran day and night until 6 May.
The prizes were cut to match the sales, and the first prize shrank to £416 13s 4d. The whole scheme raised less than £5,000, and an emergency loan from London merchants had to cover the harbour repairs instead.
The cousin word lotto took longer to reach English. It arrived in 1778 as the name of a game like bingo, from French loto and directly from Italian lotto. Only in the 1820s did it come to mean a lottery.