The England international was on the verge of leaving Villa to Liverpool in the summer but the move collapsed after the two clubs failed to agree a fee.
"Gareth, to his great credit, has put aside the disappointment of not joining Liverpool during the last transfer window," O'Neill was quoted as saying by The Sun.
"He has put his head down and got on with things and he has been excellent for us. My own view is that he is now actually playing better than ever."
Despite being an important asset in England's setup, O'Neill insists that Barry is yet to reach his full potential with the Three Lions.
"Gareth gets more freedom to play with us than he does with England. Stiliyan Petrov is the one who does the holding for Villa which allows Gareth to go forward."
Barry is set to feature for England in their upcoming World Cup qualifiers against Kazakhstan and Belarus on October 11th and 15th.