He has been switched alongside Villa skipper Stiliyan Petrov for the past three games including Saturday's 1-0 triumph over Manchester United at Old Trafford.
But O'Neill bristles at the suggestion the move will damage the 23-year-old's international prospects and believes it will enhance them ahead of tonight's Barclays Premier League clash at Sunderland.
O'Neill said: "I said to James in the summer that he could play in central midfield.
"We talked about it and, for me, it was not as big a gamble as you think because I had watched him train and thought he was capable of doing that.
"His performances in there have been very encouraging. He is a very good player. He came essentially as a wide right player who could also play wide left.
"It is only when you watch him train, you feel he is capable of playing in a few other positions. He is very comfortable at doing that.
"We are all pleased with the development of him as a player and his ability to play in a number of positions would enhance his credentials for England rather than the other way around.
"I don't think for one second I am doing him a disservice in terms of England. I don't think James does either.
"When the squad is eventually picked, there will be room for one or two 'play-anywhere' players.
"Eventually, when everyone settles down, people would like to play in their proper positions. But James has distinguished himself in positions you probably wouldn't have thought probable some time ago."
Villa will go to the Stadium of Light in buoyant mood after toppling Liverpool, Chelsea and now Manchester United this season to climb into third spot in the table.
O'Neill said: "There is a good belief about the team. That is because we've been playing well and confidence is very, very important.
"If you ally that to a bit of talent in the team, then you've got a bit of a chance. We've got a bit of confidence about ourselves primarily because we look as though we are dangerous going forward.
"While there are other aspects of our game we could attempt to improve on, and would need to improve on, if we are to hang in there, then that is fine."
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