The Danish international was struggling for fitness when O'Neill took charge of Villa 18 months ago and was dogged by a knee problem for three years after a £3million move from AC Milan.
Now the 30-year-old is believed to be on the verge of clinching a new two and a half year deal which will keep him at Villa Park until the end of the 2009-2010 campaign.
O'Neill admitted: "We would be disappointed if we couldn't sort this out (the new contract) and Martin has had a great season.
"We are desperate to keep him, have done everything we possibly can, and want to come to an agreement.
"Aston Villa fans, just the same as ourselves - all the backroom staff - want him to stay. He is a great lad but more than that he has the heart the size of a lion.
"This time 16-17 months ago, when I first set eyes on Martin after coming to Villa, he even walked with a limp - never mind run with one.
"You would have been hard pressed to find anyone to believe Martin would have made the impact that he has done for Villa this season.
"But that is down to him although I think the medical staff have also helped him as well."
O'Neill added: "This has had nothing to do anymore with him having to prove himself in terms of staying free from injury and he has played three times a week consistently.
"Anyone can get injured at any given moment, but he has proved himself and deserves a new contract."