Capello saw Young turn in an outstanding performance for Villa during their exciting 2-2 Premier League home draw with Wolves.
The former Watford player set up the first of John Carew's two goals and delivered a constant stream of menacing crosses throughout the 90 minutes.
Tough battle: Ashley Young battles with Kevin Foley during Villa's clash with Wolves on Saturday
O'Neill is aware of the perception the normally confident and bubbly Young goes into his shell when he has joined up with his country.
But he has told him to go and reproduce his club performances with Capello having made it clear he selects players who are in form.
O'Neill said: 'Does Young lack a bit of confidence when with England? He might do. I don't know that. That is something that seems to be on the rumour mill, that he doesn't exude the same self confidence.
'If that is the case, I understand that. Sometimes you get someone believing in you, which I do with Ashley Young who is naturally vibrant.
'But sometimes when they go away and are mixing with a group of other people, sometimes you don't want to be the same character because you think of all those great players England possess who have been there and done it.
'There is a tendency to be a wee bit quiet but it doesn't mean you should desert your own character.'
O'Neill added: 'Ashley doesn't have to go and show off with England.
'All he has to do is go in and perform in the manner he has for his club because that is what Mr Capello is doing, picking players on club form.'
In full flow: Stephen Ward in pursuit of Ashley Young at Villa Park
Carew took his goal tally to 13 for the campaign and O'Neill is hoping he can stay fit and in form for the remainder of the season particularly with top scorer Gabriel Agbonlahor having picked up a foot injury.
O'Neill said: 'John is coming into good form at the moment and seems to have been clear of the little niggles which have affected him this year.
'I hope he can stay fit between now and the end of the season as we will needhim. We will need everybody. You've got to get in there, got to score them - andhe did that on both occasions.'
O'Neill is also concerned about the fitness of central defender Richard Dunnewho suffered an Achilles injury against Wolves.
The Villa boss said: 'Gabby was sore on the morning of the game. He finished Friday's training session and then went off feeling very sore and yesterday morning there was no improvement. I'll have news for you on Monday.
'Richard Dunne did well to come out for the second half because he has got an Achilles problem.
'He was very sore at half-time but we'll monitor it and see how it goes. Is that the number of games catching up with him? I think it is a combination of those things.'
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