Escherichia coli K1 causes disease in humans and birds. Its polysialic acid capsule can be O-acetylated via phase-variable expression of the acetyltransferase NeuO encoded by prophage CUS-3. The role of capsule O-acetylation in ecological adaptation or pathogenic invasion of E. coli K1 is largely unclear. A population genetics approach was performed to study the distribution of neuO among E. coli K1 isolates from human and avian sources. Multilocus sequence typing revealed 39 different sequence types (STs) among 183 E. coli K1 strains. The proportion of the ST95 complex (STC95) was 44\%. NeuO was found in 98\% of the STC95 strains, but only in 24\% of other STs. Grouping of STs and prophage genotypes revealed a segregation of prophage types according to STs, suggesting coevolution of CUS-3 and the E. coli K1 host. Within the STC95, which is known to harbour both human and avian pathogenic isolates, CUS-3 genotypes were shared irrespective of the host species. Functional analysis of a variety of strain pairs revealed that NeuO-mediated K1 capsule O-acetylation enhanced desiccation resistance. In contrast, NeuO expression led to a reduced biofilm formation in biofilm positive E. coli K1 isolates. These findings suggest a delicate ecological balance of neuO'on'/'off' switching.