The 31-year-old put pen to paper after passing a medical and agreeing personal terms with the midlands club.
He becomes O'Neill's first signing in the January transfer window and is set to make his debut in Tuesday's Barclays Premier League clash at Portsmouth.
O'Neill said: "I am absolutely delighted. Emile has been a brilliant player for a number of years and this is great news. It gives us all a big boost - the football club, myself and the players.
"He has arrived at a really important time. We have got a bit of momentum going. We haven't the largest squad in the world.
"John Carew is coming back from his back injury but is still a week or two away from being ready to return and Emile couldn't be arriving at a more opportune moment.
"I think he could play with Gabby (Agbonlahor) and John (Carew) and I think he will give us an enormous lift. I have got no doubts that he will improve us and will help to improve Gabby and other players around him.
"When people like Wayne Rooney and Michael Owen say Emile is good to play with, that is good enough.
"I am delighted he has come now because he would have had a lot of interest in the summer when his contract was ended.
"I think he should be not only happy in the environment here, I think he should thrive in it."
O'Neill added: "I know Emile from my days at Leicester, and he was fantastic for us. He had plenty of natural talent, even though he was only a young kid.
"He played out wide for a season and did the sort of work that Ashley Young and James Milner now do for us at Villa.
"We were sad to see him leave. But he wanted to go to Liverpool and play with Michael Owen - and he has done exceptionally well in his career.
"I will be delighted to renew acquaintances with him. He is still relatively young at 31, and in good shape."
Heskey's expected arrival has come too late for him to be involved in the FA Cup clash with Doncaster at the Keepmoat Stadium.
But he will be eligible to play later in the competition if Villa make progress, after not featuring for Wigan in their third-round tie against Tottenham.
Source: Telegraph
