O'Toole enjoyed a loan spell with the Pirates last season and has now signed a three-year contract at the Memorial Ground.
U's boss Dunne believes the 24-year-old has made a good career decision.
He told the club's official website: "I think John-Joe has made the right choice of club for this move.
"In the current market he was in a positive position of having a choice and I feel he's made the right one for himself.
"His opportunities here would have been limited with the competition for places in the centre of midfield.
"On behalf of everyone at the club, I would like to wish him well and thank him for his time at the club."
O'Toole signed for Colchester in January 2010 and made a total of 76 appearances during his time in north Essex.