England and Wales have been drawn in the same qualifying group for Euro 2012 in Poland and Ukraine. Switzerland, Bulgaria and Montenegro are the other teams in Group G following the draw in Warsaw.
England last played Wales back in 2005 in a World Cup qualifier, claiming a 1-0 win in Cardiff.
"All four opponents are really dangerous," Capello said. "Wales will be my first derby as manager of an international team. It will be interesting. They are really young but the value of the players is high.
"I prefer a smaller group because we have less games but the group is very tough.
"Switzerland qualified for the World Cup, they are one of the best teams. I remember when I played against them it was not easy to win away.
"I have big confidence in my team and I am sure we will play a fantastic qualifying tournament for 2012."
Wales last qualified for the finals of a major championship at the 1958 World Cup, but they did reach the quarter-finals of the European Championship in 1976 when the tournament was decided on a knockout basis.
"Without doubt, drawing England will please all the Welsh fans - plenty of history there and we like nothing better than another chance against the old enemy," said Wales boss John Toshack.
"I know Fabio Capello quite well, so will look forward to being able to pit our talents against a powerful England team later in the year." Euro 2012 qualifying draw:
GROUP A: Azerbaijan, Kazakhstan, Belgium, Austria, Turkey, Germany
GROUP B: Andorra, Armenia, Macedonia, Republic of Ireland, Slovakia, Russia
GROUP C: Faroe Islands, Estonia, Slovenia, NORTHERN IRELAND, Serbia, Italy
GROUP D: Luxembourg, Albania, Belarus, Bosnia, Romania, France
GROUP E: San Marino, Moldova, Hungary, Finland, Sweden, Netherlands
GROUP F: Malta, Georgia, Latvia, Israel, Greece, Croatia
GROUP G: Montenegro, WALES, Bulgaria, Switzerland, ENGLAND
GROUP H: Iceland, Cyprus, Norway, Denmark, Portugal
GROUP I: Liechtenstein, Lithuania, SCOTLAND, Czech Republic, Spain