The Red Devils are three points behind their crosstown rivals and eight points adrift of Arsenal, with the Gunners having a Premier League match in hand.
City dropped vital points in a 1-0 defeat to Tottenham on Sunday and Everton caused a stunning 1-0 upset over Arsenal at Goodison Park on Saturday.
Neville insisted that it is not “ridiculous” that United could win the league title this season, despite suffering a major blow in losing Christian Eriksen through injury.
“Are we in with a chance again? Look, I don’t think Manchester United will get there, I think they will fall short,” he said on Sky Sports’ Gary Neville Podcast.
“They’re just not quite there and the Christian Eriksen injury will hurt, but they’re doing really, really well and they’re competing again.
“They look happy, too, and that’s a really big thing. You need that. From that point of view, United are doing well.
“It’s not ridiculous to say they could win the title. I don’t think they will and I’ve never thought they will this season because it’s a bit early for that but I would be getting worried if I was Manchester City.
“The fans will start getting worried now with the way they’re playing and the way Pep Guardiola is tinkering with the team.
“United look a happy bunch, City look a bit moody and need to come out of that spell.
“Man City could easily still win the league but Man United are in a good position, too.”
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