The 59-year-old was disappointed to hear of Capello's resignation and will be even more so if the Italian's decision is due to the disagreement over John Terry's captaincy
The Northern Irishman's side beat Middlesbrough 2-1 in their FA Cup fourth-round replay on Wednesday evening thanks to a goal from Stephane Sessegnon deep into extra-time, following strikes from Jack Colback and Lukas Jutkiewicz in either half of the 90 minutes.
The FA had confirmed that Capello was resigning from his role as head coach of the national side inside the hour before kick-off, and the Black Cats' boss was far from happy at the decision.
He said: "I am really, really disappointed for him because he has earned the right to take the team through to the finals because he has got them there in the first place.
"He is a splendid manager and he has proven that over the years. I really am disappointed for him that it has come to that and I am actually quite sad about it."
The former Aston Villa manager has been linked with the England job himself when it has been available in the past, but he ruled himself out of the running, insisting Redknapp is "the one".
He added: "Redknapp would be my favourite. Fabio was going to leave this summertime after the Euros anyway and that Harry would be the favourite to take over. I think he should be and he will have deserved that opportunity too. I think he should be the one."
When further pressed on the question of whether he wanted to be considered, he replied: "I have just said it. I think he [Harry Redknapp] should be the one.
"I think that there has been a cry-out now for an English manager and his achievements at Tottenham over the last couple of years have been outstanding. He has got them into the Champions League and it looks as though he will get them there again.
"He has done exceptionally well and obviously with the result today for him the court case is no longer hanging over him and that will be a great relief to him."
It has been widely reported that Capello had a disagreement with the FA over their decision to remove John Terry as England captain, O'Neill claimed that he would be even more disheartened by the situation if it turns out that the Italian has been forced out over the affair.
When asked if he blamed the FA for the 65-year-old's resignation, he replied: "I'm not sure about that, but what I'm saying is the Fabio Capello is not only a fantastic manager, but he's earned that opportunity and if it is over the incident with John Terry then its very, very sad indeed."