O’Neill revealed last week that Milner, 24, had told the club he wanted to move to Eastlands.
City have so far had a £20 million offer for the player rejected and are understood to be willing to go no higher than £24 million, still short of the £30 million it is thought Villa want.
O’Neill is now unsure of whether the move will now go through.
"The latest state of play is Manchester City have gone as far as they want to," O'Neill told the club's website.
"We'll wait with bated breath on that one, myself included."
"I think obviously the overriding opinion of all Villa fans is that they would love James to stay at the football club.
"But as I speak here now at this minute, my honest opinion, I cannot guarantee that, but we will see."
Should Milner remain at Villa Park, O’Neill is confident that his performances will remain at the level that saw him establish himself as an England regular.
"There is no question that James Milner will continue to give his best if the deal doesn't go through.
"James loves playing and last season played when others wouldn't.
"That is why I have no concern in regard to his character and involvement with Villa."
Speaking of City, who former Villa captain Gareth Barry joined last summer, O’Neill says he can see the attraction the club must have to players.
"I can understand totally that players would be affected by offers from Manchester City, particularly in this day and age where it looks as if they can get who they want.”
Milner is now due to fly out to Portugal with the rest of the Villa squad.
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