Roger Johnson was penalised for his tackle on Gabriel Agbonlahor, despite getting his foot to the ball, and James Milner converted the 83rd-minute winner in the Premier League clash at Villa Park.
"There's no dispute about it," O'Neill said on Sky Sports 1. "It's a penalty kick.
"I've seen it back since and it's a definite penalty. It's a penalty - simple as that."
O'Neill admitted Birmingham were the better side in the second half, but praised his side's character.
"We were second best in the second half, but the crowrd urged us on, kept us going and the players kept us going.
"We've shown grit and great spirit."
Brad Friedel believes Villa can still qualify for the Champions League.
The victory lifted O'Neill's men level on points with Tottenham, having played a game more.
Asked if they could still finish fourth, Friedel said: "Absolutely, we're not going to quit until it's mathmatically impossible."
Birmingham boss Alex McLeish was adamant Johnson's tackle was a fair one. "It was a great tackle, simple," he said on Sky Sports 1. "It was a bad mistake by the ref. He was not up with the play.
"It was a great touch by Roger Johnson. He's made a name for himself in the Premier League with that."
McLeish added: "I thought we deserved to win it let alone losing to a controversial penalty.
"I am disappointed such a big game and big decision went against us."