Matt Fryatt hit the only goal of the game and O'Neill said afterwards: "We didn't play well enough, and it is particularly disappointing after our recent league form.
"We wanted a home tie. It was a game, even though I made changes, that we were capable of winning.
"We didn't do enough to deserve that. Credit to Leicester. They took their chance when it came along - but we didn't have enough tempo to our game.
"We put some pressure on only after they had scored. The players who came into the side were decent players - but we just didn't do the business.
"We didn't treat this game lightly. I said beforehand I wanted to win and have a good run in the competition, and it's disappointing to go out now."