Dunne made the £6million switch to Villa Park after it became apparent the arrival of Joleon Lescott and Kolo Toure meant his first team involvement would be limited at City.
He quickly tormented his ex-employers by scoring for Villa in a 1-1 draw with City in October.
Dunne chose not to celebrate the goal, received a standing ovation from the City fans and can expect a similar reception on Saturday.
The Republic Of Ireland international was named in the PFA Premier League team of the year at Sunday's awards.
But Dunne's main focus will be in trying to help Villa pip City for a Champions League spot and they are currently level on points with fourth placed Tottenham although they have played a game more.
O'Neill said: "Richard deserved the reception he got in the game at Villa Park. Manchester City would accept he was brilliant for them over eight or nine years.
"Richard Dunne was exceptional for Man City over a long period of time. He became an iconic figure. We are just delighted to have him.
"He has made an immediate impact coming here and he has been a really great signing.
"Richard was voted into the PFA team of the year which was a great boost for him. He would have derived a great deal of benefit and confidence from that."
O'Neill accepts Villa have to win their remaining two games to have a chance of finishing in fourth position.
But he can take confidence from his side having the second best away record in the Premier League after Manchester United.
He said: "Self belief can't be much higher. We have got over the debacle of losing 7-1 at Stamford Bridge a month ago, have fought back magnificently and given ourselves a chance.
"That is all we could have done from that position we were in. We will go to Manchester City with loads of confidence after taking 13 points from 15.
"We know we have to win and the only way we have been able to do that is going at teams.
"Our away record is terrific. People will say that is because we have pace in the side and are capable of beating teams on the break and I would not disagree with that.
"We are going into the game with confidence and with a chance of winning."