The finite-difference time-domain (FDTD) method, which is important in photonic hardware design flow, is widely adopted to solve time-domain Maxwell equations. However, FDTD is known for its prohibitive runtime cost, taking minutes to hours to simulate a single device. Recently, AI has been applied to realize orders-of-magnitude speedup in partial differential equation (PDE) solving. However, AI-based FDTD solvers for photonic devices have not been clearly formulated. Directly applying off-the-shelf models to predict the optical field dynamics shows unsatisfying fidelity and efficiency since the model primitives are agnostic to the unique physical properties of Maxwell equations and lack algorithmic customization. In this work, we thoroughly investigate the synergy between neural operator designs and the physical property of Maxwell equations and introduce a physics-inspired AI-based FDTD prediction framework PIC2O-Sim which features a causality-aware dynamic convolutional neural operator as its backbone model that honors the space-time causality constraints via careful receptive field configuration and explicitly captures the permittivity-dependent light propagation behavior via an efficient dynamic convolution operator. Meanwhile, we explore the trade-offs among prediction scalability, fidelity, and efficiency via a multi-stage partitioned time-bundling technique in autoregressive prediction. Multiple key techniques have been introduced to mitigate iterative error accumulation while maintaining efficiency advantages during autoregressive field prediction. Extensive evaluations on three challenging photonic device simulation tasks have shown the superiority of our PIC2O-Sim method, showing 51.2% lower roll-out prediction error, 23.5 times fewer parameters than state-of-the-art neural operators, providing 300-600x higher simulation speed than an open-source FDTD numerical solver.