Not only unnecessary, but actually allows water into the splines. On ALL drives I service, that 'O' ring is removed and never put back! And yes, Merc later (and on replacement lower drive shafts) didn't even machine an 'O' ring groove.
Addendum to my recent question: I put a lot of Mobil 1 synthetic grease on the splines right before I re-installed the lower. If the only risk is water to that joint, I would think the excessive grease would keep it out for at least a few months?
I would prefer not to drop that lower again right now but will if I must.
Some times the o ring hooks up on the seal as it enters the spline. This is what allows the water in. Personally, I'd pull it out again. Throw the o ring as far as you can.