Victory for the hosts would not only be sweet for their fans but would also keep O'Neill's side on course for a possible place in next season's Champions League.
Back-to-back wins against Portsmouth and Hull have put Villa firmly in the shake-up for a fourth-place finish.
O'Neill said: "We need to win games to make sure of European football for the third successive season. So a win over Birmingham is of great importance.
"There is plenty to play for and while that remains the case we have got to give it everything we've got.
"When we go into Sunday's game we will have a fair idea of what has transpired the previous day and will know what we have to do.
"The players know what is at stake and these days they are fully aware that every position in the Premier League is worth a great deal of money.
"So if teams and players are mentally thinking of turning off I think owners, directors and the occasional manager would be trying to change those thoughts."
O'Neill expects to be facing a fired-up Birmingham team who will have some inside knowledge of his Villa side.
Midfielder Craig Gardner left Villa for Blues in a £3million deal in January.
O'Neill will seek out the former England Under-21 international after discovering - following his departure - that Gardner is a Birmingham fan.
In a lighthearted mood, O'Neill jokingly added: "I'm afraid that I am going to have words with Craig Gardner on Sunday when I see him after it emerged that he was a closet Birmingham fan.
"Seriously, he is a terrific lad and he wanted to be playing more regularly than he was, here at Villa Park.
"I was disappointed when he left because in an ideal world I would have loved to have kept him because he was great around the place.
"I think that he always thought that had he been given a real run in the team in a more forward role in centre midfield he could score goals.
"I wouldn't dispute that but he didn't get that regular run of games he was looking for and you always thought with Craig that if he could get those games his match fitness would naturally improve.
"I have no doubt that he will be an asset for Birmingham."
The last time the teams met at Villa Park, in April 2008, the home team raced to a 5-1 win.
O'Neill would love a repeat but expects to be facing a far sterner test this time around.
He said: "I well remember the 5-1 win we had over Birmingham a couple of years ago.
"I know they finished up getting relegated that season but they have come a long way since then.
"They fought back magnificently last season to get back into the Premiership with a better team than the last time they played at Villa Park.
"We played exceptionally well that day and scored a lot of goals.
"It was only a week later that I realised the sort of effect it had on the team and for the fans and that is pretty important in this day and age."