Hill led 2-0 and 4-3 before eventually losing 5-4 to O'Sullivan in the German Masters qualifiers played in Barnsley.
Wednesday's match was O'Sullivan's first since losing Sunday's UK Championship final in York.
The 20-year-old world number 91 said taking O'Sullivan to a decider is a "great step forward" in his career.
For the past 12 months the Isle of Man's only professional player has been battling with an inflammatory bowel disease called ulcerative colitis.
He admits his battle has been "extremely difficult".
Symptoms can include diarrhoea, pain, anaemia, fatigue and sometimes inflammation of the joints, skin, liver and eyes.
"All I was thinking before I went on was to just get a frame and not disgrace myself but I took the first and felt good from there.
"It was a great feeling after having a difficult few months and even last week I was advised not to travel to this."
Born in Leeds, Hill has lived on the Isle of Man since he was six and turned professional after winning the European under-21 title whilst representing the island.
He continued: "At 2-0 up I was starting to fancy the job and it helped that I was just enjoying every minute of it.
"I knew Ronnie wouldn't be geared up the same as for the UK final but as the match progressed it was becoming more serious.
"Even though I only lost 5-4 looking back I am a little disappointed I didn't finish the job as it was a good chance to beat Ronnie."
Hill's next match will be against English Open winner Liang Wenbo at the Scottish open.
The Isle of Man's Darryl Hill came within one frame of a memorable victory over five-time world snooker champion Ronnie O'Sullivan.