O'Neill has made it clear that calm heads are vital if Villa are to record a sixth successive victory against Birmingham to keep alive their hopes of qualifying for the Champions League.
He said: "To win a derby game you need discipline. I think discipline is important in these games as referees want to lay down the law pretty quickly.
"Incidents in a derby game seem to magnify themselves and if you pick up a yellow card early on it is a long way to go to keep out of further trouble.
"Villa have won the last five games between the sides and we are certainly capable of beating Birmingham.
"Are they capable of coming here and stifling us and making it exceptionally hard? Absolutely.
"We will have to be very strong mentally and force ourselves on the game. The highly charged atmosphere of a local derby should go on and inspire the players and I think it should be a very decent atmosphere."
O'Neill knows that defeat is unthinkable for the Villa fans, but it would carry a double blow as it would almost certainly end their hopes of a top-four spot.
"To finish fourth we need to win our remaining three games and other results would have to go our way," O'Neill admitted.
"At this stage, when there is a bit of tension around, anything is possible but the most important issue is to try and win."
Birmingham head into the game without a win in their last seven matches but O'Neill does not think that will have any bearing on the game.
"That will not effect them going into a derby," he added. "They have done excellently all year and they have been a surprise to most people.
"They have eked out some amazing results this season and have done it through a lot of hard work, a lot of discipline and a lot of controlled play.
"I think that is the sort of side we are going to face and not a team which has not won in the last seven matches.
"Birmingham will be coming to Villa Park with plenty of confidence and in a better frame of mind than perhaps a couple of seasons ago when they lost 5-1.
"They have become a better team since then and I think we are a better side. But to ask us to repeat a game like that when we won 5-1 will be asking a lot."
The clash also sees O'Neill renew his rivalry with Birmingham manager Alex McLeish.
The pair got used to going head to head when they were in charge of Celtic and Rangers respectively and O'Neill holds former Scotland boss McLeish in high regard, especially after he guided Birmingham back into the Premier League at the first attempt last season.
O'Neill said: "I haven't been surprised that they bounced straight back in the Premiership, but that is hard.
"It is terrific as there is a lot of despondency around when you have been relegated and it is hard to pick yourself up in those circumstances.
"When you come back so quickly I think you are automatically stronger and the sort of resilience sets in early.
"Alex McLeish has done very well and I am sure he will be looking forward to next season and looking forward to getting things together and trying to improve the team even further."