Gardner looks poised to complete a move to Birmingham if the two clubs can agree on a fee after the initial offer for the player was rejected.
The England Under-21 international has had only a bit-part role to play at Villa this season.
Wolves have also inquired about Gardner but Birmingham are the only club to have so far made a definite bid.
"I know Craig wants to play," O'Neill told Press Association Sport. "In an ideal world, I would love to keep him. He is as genuine as they come. There are some players who have left in my time here who haven't made a most incredible contribution.
"But I would be sorry to see Craig go but accept the fact if two clubs agree a fee, that he would probably would go. Birmingham have made a bid and, as it stands, it hasn't been accepted. There have been other enquiries but, as we speak, those other clubs haven't made a bid.''
Gardner could become Birmingham's second January signing, following Sporting Gijon midfielder Michel to St Andrew's. He would link up with two former Villa team-mates, defender Liam Ridgewell and veteran striker Kevin Phillips.