Allardyce's future at West Ham has been the subject of conjecture with the former Bolton boss seeing his current deal expire at the end of the season.
West Ham co-owners David Sullivan and David Gold have put off talks over fresh terms until the end of the campaign, raising doubts over Allardyce's long-term future.
O'Neill has offered his backing to Allardyce and believes he deserves credit for the job he has done at West Ham.
"I think the gaffer has done a fantastic job. Teams that went down to the Championship last season like Bolton and Wolves have struggled," O'Neill said.
"The job the gaffer did last year to get us straight back up and keep us clear of relegation is fantastic. The lads all love working for him.
"He's been great and we're trying to do the best job we can for him. The rate managers are sacked surprises me."
Meanwhile, O'Neill believes West Ham should move to bring Chelsea midfielder Frank Lampard back to the club.
Lampard, who started his career at West Ham, is out of contract at the end of the season and as yet fresh terms have yet to be agreed.
The England man has been tipped to leave Stamford Bridge in the summer and O'Neill, who will come up against Lampard in Sunday's clash between the two sides, would love to see the Hammers make a move for the 34-year-old.
"It's surprising when a player of that stature and quality is allowed to run a contract down," added O'Neil. "He is a fantastic player and would be great here if the club could get hold of him.
"I remember playing against him once for Portsmouth. Harry Redknapp asked me to try to follow him.
"Well, I've followed him around the Bridge many a time and you think you've got him at 0-0 with 10 minutes to go. But you lose him once and that's it.
"It's happened to me a few times - but hopefully not this time. We're both getting old at the same rate anyway!"