O'Neill is not amongst the sceptics who question whether Mark Hughes' side will take time to fully gel after a massive summer spending spree at Eastlands. Villa have similar ambitions of challenging for a Champions League spot and will be put to the test when they tackle City in Monday's home clash.
"City are a very big threat to the top four. They are playing with a great deal of confidence and very well. They are a genuine threat to the top four, even as soon as this year," said O'Neill.
"You can draw comparisons with Chelsea a few years ago. They had a talented manager in place (Jose Mourinho) and won two Premier League titles on the bounce.
"They made Manchester United, Liverpool and Arsenal sit up and take notice.
"Now Manchester City have been able to accumulate players by spending big. In a couple of years time probably some other club will be able to do the same again."
O'Neill added: "I saw them against West Ham last Monday night and they played exceptionally well. They are flying and now they have got Adebayor to come back in.
"I assume he will start because he has played splendidly. He is a very good player.
"I am not sure what happened with Arsenal but he has gone to City and is flying at the minute."