The comedian is reportedly demanding at least $5 million in the suit, filed Thursday, for damages to his public reputation. His camp is also asking for a jury trial.
O'Connor took to Facebook to accuse Hall of providing drugs to Prince for "decades," before his death last month.
But Hall claims the accusations are "despicable, fabricated lies," calling the Irish singer a "desperate attention-seeker."
In her posts, O'Connor also claimed Hall spiked her with drugs during a party at actor Eddie Murphy's house.
"Two words for the DEA investigating where prince got his drugs over the decades ... Arsenio Hall. Anyone imagining prince was not a long time hard drug user is living in cloud cuckoo land," she wrote in the now-deleted notes, according to CNN.
"Arsenio I've reported you to the Carver County Sheriff's office. Expect their call. They are aware you spiked me years ago at Eddie Murphy's house. You best get tidying your man cave."
Hall's legal team filed the lawsuit in Los Angeles, stating the singer is "now known perhaps has much for her bizarre, unhinged rants as for her music." They claim Hall has only had "minimal" contact with Prince while he hasn't spoken with O'Connor in "approximately 25 years."
"Hall will not stand idly by while O'Connor attempts to get attention for herself by recklessly spreading malicious, vile lies that he engaged in egregious criminal conduct which falsely links Hall to Prince's death," the lawsuit read.
Singer Prince was found dead in an elevator at his Paisley Park complex in Minneapolis on April 21. Painkiller drugs were found on his body at the time.
Authorities have yet to release an official cause of death.