Wolves led through a Matheus Cunha strike in the first half and they went into the break without facing a shot on target from Villa in a lively West Midlands derby.
But Unai Emery's Villa came out for the second half with renewed vigour, scoring three goals in the last 20 minutes to leave Wolves joint-bottom of the standings with Everton after five games as the pressure mounts on O'Neil.
"The first half we played very well. No team comes here and wins at a canter. It was not like they were banging the door down," O'Neil told BBC.
"But when we need to fight we need to do it better. The lads are finding out the hard way you cannot play well for a bit. It's disappointing we have come up short."
Wolves looked the stronger side in the first half but as the match wore on and Emery made attacking substitutions, the visitors were pegged back until Ollie Watkins and Ezri Konsa scored to turn the tide before Jhon Duran made it 3-1.
"That (second) goal has to be stopped as does the first goal. We need to make sure the fixtures, we have some really tough ones coming up, we need to find a way to fight and scrap," he added.
"We're not going to dominate games against Aston Villa and Liverpool. We need to behave and act like a team scrapping for everything. We have to make sure we are better when it gets tough."
Wolves were also dealt another blow when Yerson Mosquera was taken off on a stretcher with what looked like a knee injury, adding to a long list of injured players at the club.
"It doesn't look good at this moment. It's a big blow for us," O'Neil said.
