The Black Cats progress to round four courtesy of two fantastic second-half goals from Craig Gardner and James McClean but it was the dismissal of Cattermole that left O'Neill with a bitter taste in his mouth.
The 24-year-old combative midfielder has now been shown five red cards in his Sunderland career and O'Neill felt his skipper gave referee Stuart Attwell little choice but to send him off for a first-half lunge on young MK Dons full-back Adam Chicksen.
He said: "From the minute you start lunging in you are giving the referee no option. It looked from the sideline that the referee had no option.
"I think that whatever we say, we can watch it back a hundred times, the referee is watching someone lunge in and you run that risk, it is crazy."
O'Neill, who has won the League Cup on two occasions as a manager with Leicester, felt Cattermole set a bad example for his team-mates.
"You can't do it, we talked about discipline before the game and there we are, down to 10 men, it is a hard enough battle here and he didn't help himself and he didn't help his team," he said.
"He started the season off brightly for us and he's a great leader - but he has to have discipline himself.
"There is no point asking for discipline from the team when you don't show it yourself."
Gardner's tremendous 25-yard free-kick and an individual effort from McClean secured a relatively safe passage into the next round and O'Neill felt his players overcame a potentially tricky fixture to get there.
He said: "I don't want to go overboard about it but it is good to win.
"I was very concerned tonight considering some of the players we had to leave out of the team.
"To win tonight was great, considering the circumstances of playing most of the game with 10 men.
"I'm obviously delighted we won the game and it is really pleasing to be in the hat for the next round."
Another positive for O'Neill was being able to give some game time to winger Adam Johnson.
The summer signing from Manchester City has been missing with a thigh injury but was introduced with six minutes to go as he continues his comeback.
O'Neill added: "Of course McClean was excellent and scored a great second goal that allowed me to get Adam Johnson on the pitch for a few moments.
"It was one of those where I wanted to try and give him just a feeling for things again.
"In an ideal world it would have been great if he had a little longer, another aspect was of course that there was a chance of the game going into extra-time and there was a chance of him getting on."
MK Dons manager Karl Robinson felt his side could have come out on top in the game but was pleased with the way his players took the game to their top-flight opponents.
He said: "I thought we deserved a little bit more out of the game to be honest and I think most people in the ground would agree with that.
"What a wondergoal that was at 0-0 and that took the stuffing out of us.
"We had to go on the front foot, because we have got the man advantage and we were also a goal behind.
"We knew then that if we were going to concede a goal it would be on the break to either (Louis) Saha or McClean because that is the quality they possess."
Robinson was also looking forward to learning from his counterpart and enjoyed pitting himself against a Premier League club.
"We have had four changes and weren't at full strength either," he said. "I think we played well enough tonight but Sunderland have shown us tremendous respect and I'm looking forward to having a chat with Martin O'Neill and picking his brains so I can improve as a manger as well."
