Milner has started Villa’s last three matches in the centre of midfield, following the return of Stewart Downing from injury.
O’Neill said: “I said to James in the summer that he could play in central midfield.
“We talked about it and, for me, it was not as big a gamble as you think because I had watched him train and thought he was capable of doing that.
“His performances in there have been very encouraging. He is a very good player. He came essentially as a wide right player who could also play wide left.
“It is only when you watch him train, you feel he is capable of playing in a few other positions. He is very comfortable at doing that.
“We are all pleased with the development of him as a player and his ability to play in a number of positions would enhance his credentials for England rather than the other way around.
“I don’t think for one second I am doing him a disservice in terms of England. I don’t think James does either.
“When the squad is eventually picked, there will be room for one or two ‘play-anywhere’ players.
“Eventually, when everyone settles down, people would like to play in their proper positions. But James has distinguished himself in positions you probably wouldn’t have thought probable some time ago.”