The visitors were put to the sword by Roberto Mancini's men at the Etihad Stadium, as goals from Mario Balotelli, Adam Johnson, Vincent Kompany and James Milner sank the Villains
The hosts swept the Midlands outfit aside, as goals from Mario Balotelli, Adam Johnson, Vincent Kompany and James Milner secured all three points for the Blues, and McLeish is convinced that Roberto Mancini's men have what it takes to challenge for the Premier League crown.
Speaking after the game, he said: "They've got to be contenders with the squad that they've got, there's absolutely no doubt about that.
"City have obviously changed and rotated their team a little bit today but they can bring in players for which they've paid £20-£30 million to replace those guys that are out.
"After a nervy start they got their goal which settled them down and when you go a goal down at these type of clubs it can be very difficult."
Despite being impressed with City, McLeish was more focused on his own side's showing, and lamented the defending for each of the home team's four goals.
"I think it was a bad day at the office but to lose I'm extremely unhappy and disappointed, especially after the way we started the game.
"We left two up front, though they had to do their fair share of tracking back but if we lose goals in the way we did today, whether we play Man City or an amateur team, you're going to lose goals if you're not organised at set-pieces.
"They had three men in the box, Kompany had a free run for his goal and these things shouldn't have happened because we'd organised the players to pick up the important City targets and that's why I'm extremely disappointed.
"We started well, Gabby [Agbonlahor] had a great chance and it was a great save by Joe Hart. You need to take your chances at places like this and to lose the goals they way we did was comedy cuts."
It was Villa's first defeat of the season and the Scot was quick to reiterate that his side were in a stage of transition, but admitted that the defending of his charges at the Etihad Stadium was unacceptable.
"We're a team that are in transition, there are a lot of young players in the squad and there's a learning curve there but as I said, I'm disappointed we didn't come away from here with something and I think if we had defended better at corner kicks, I believe we would have.
"If you lose goals like that then you can forget it. Needless to say we'll be on the training ground this week trying to put that right. Every other team will be looking at the result and thinking that City must have cut Villa to ribbons but they didn't. It was horrendous defending."