The Boys in Green came into the game against Cesare Prandelli's World Cup-bound team on Saturday, having suffered a 2-1 home defeat at the hands of Turkey last week.
O'Neill's team, which featured new faces in the form of Alex Pearce, David Meyler, Jeff Hendrick and Anthony Pilkington in the starting XI, showed a marked improvement against the Azzurri and tested goalkeeper Salvatore Sirigu on a number of occasions. Nevertheless, the game finished goalless.
However, despite lamenting the result, the former Celtic and Aston Villa manager lavished praise on his players.
"[I'm] very disappointed we didn't win the game," O'Neill told Premier Sports after the game.
"We were a bit tentative early on, but outside that we were absolutely phenomenal. We had many chances, could have scored a few goals. Honestly, I thought we were magnificent.
"Italy are playing for everything with World Cup places at stake. They started well, but once we got going, we roared into the match. The passing, the playing of the ball, the movement of the players, the confidence.
"Aiden McGady was sensational. James McClean comes on with 20 minutes to go and has a fantastic time."
O'Neill indicated that the team are buoyed by their display against Italy and, with players set to leave the squad ahead of their trip to the United States, the Derry native is hoping for a fight for places in the squad.
"Seamus Coleman and John O'Shea will leave us now, and other players will come in," he added.
"Hopefully there will be a fight for places. We go into the two games with confidence. There's good confidence about the players, and tonight there's genuine disappointment that they didn't win the match."