Shaun Maloney's stunner from a well-worked corner was enough to give Scotland the win at Celtic Park and take them above Ireland in Group D of Euro 2016 qualifying.
Hanley was booked for a foul on Shane Long early in the game as the striker burst clear on goal before leading with his elbow in a challenge with Irish goalkeeper David Forde.
And O'Neill believed the Blackburn Rovers man should have been given his marching orders by referee Milorad Mazic.
When asked if he was anticipating a red card, Ireland boss O'Neill told Sky Sports: "My first reaction was that was what I thought.
"I've not seen any replays since, there may be somebody closer to the incident.
"But my first reaction was that I thought he was going to reach for the red card."
O'Neill would not blame the result on Hanley's reprieve, though, instead castigating his team's "suicidal" defending as Maloney was allowed to play his way in from the byline before beating Forde from 20 yards.
"Major games now are being decided on set-pieces and that was something we were obviously disappointed with," he added.
"It wasn't a quick build-up and we didn't react quickly enough and that is suicidal.
"Naturally I'm disappointed of course, we've lost a game I thought, for the away side, we were in pretty reasonable control of.
"We hadn't given them too many chances in the match but they scored from the corner.
"I thought it was a really tough game in the sense it was always going to be - like a derby game as it was considered, and it was like that.
"It was frenetic. It was stop-start in many aspects with some fighting on both sides but overall I didn't think we were going to lose the game."