Wolves thought they had made it 2-2 when Max Kilman headed in from a corner, but referee Tony Harrington was advised to check a monitor for an offside decision against Tawanda Chirewa who was in front of Hammers keeper Łukasz Fabianski.
While Chirewa was in an offside position, Kilman's header went into the opposite corner, with Wolves claiming that Fabianski had no chance of saving it anyway.
"My view, (West Ham manager) David Moyes' view, Fabianski's view is that it was a scandalous decision. Terrible. Horrendous," said O'Neil, who had to try to calm down his own coaching staff at the final whistle.
"I don't understand it. I can't think of an explanation, it was one of the worst decisions I've ever witnessed.
"It was a terrible decision and I'll tell you why it's a terrible decision - because the only way he can impact the keeper is if he's impacting how he can move, which he isn't, and if he impacts his vision, which he isn't."
For Wolves it was a sucker punch after they let West Ham back into the game in the second half, having earlier taken a deserved lead through a Pablo Sarabia penalty.
Lucas Paqueta's penalty levelled it up for the Hammers, before James Ward Prowse scored direct from a corner with a delightfully curled effort to put the visitors ahead.
Wolves were then denied in the cruellest of ways after a feisty conclusion.
"If you look at the side view, Fabianski can clearly see the ball over Tawanda's head," O'Neil added. "He's a fully qualified professional referee stood in front of a screen. The whole world thinks it's a terrible decision, yet a highly qualified referee is stood in front of a screen, with slow-motion replays, and manages to get it wrong."
On Ward Prowse's freak goal, O'Neil said: "I've not seen a goal like it since I was in kids' football. So it was three crazy events, firstly from us to let them back into the game, secondly the second goal which we could do better with, and then the VAR decision at the end. Three crazy incidents which have handed West Ham the three points that they didn't deserve."
