Djemba-Djemba cost Villa £1.35 million when he moved from his boyhood heroes Manchester United two-and-a-half years ago but he has made only a minimal impact with the midlands club.
The Cameroon international slipped so far down the pecking order at Villa Park that he was loaned out to Championship strugglers Burnley for the second half of last season.
It was a far cry from when Sir Alex Ferguson signed Djemba-Djemba from Nantes as a possible long-term successor for Roy Keane at Old Trafford.
With the arrival of Nigel Reo-Coker and the emergence of youngster Craig Gardner, his prospects at Villa were even bleaker this season and a parting of the ways for the 26-year-old was inevitable.
O'Neill admitted: "It is fair to say that Eric has not really experienced the best of times since he arrived here from Old Trafford a couple of years ago.
"We have agreed to part company and this arrangement will give the Eric the opportunity to rebuild and reignite his career and he goes with our best wishes."
Meanwhile, defender Mark Delaney's days at Villa could also be numbered after a longstanding battle against knee problems.
When asked about Delaney's future, O'Neill would only say: "I think that Mark may make that decision in the next few days for himself.
"I would rather anything that has to be said about that would come from Mark first. That is probably the way he would want it."
Delaney has been on a monthly contract with Villa since his previous deal ran out in June in a bid to try and prove his fitness.