Jose Mourinho's side are coming into the match off the back of two victories over Barcelona, but McManaman feels home advantage will be the deciding factor for the Premier League leaders.
"Manchester United are favourites because they are at home, but Madrid are in good shape, playing well, and come with a lot of confidence," he told Cadena Cope.
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After the back-to-back wins over Barcelona, the Bernabeu outfit head to Old Trafford full of confidence, and former Liverpool star McManaman thinks that the home side will try play on the counterattack.
"Madrid played an impressive match against Barcelona and won 3-1 so I think the English will opt for a more defensive game.
"Ferguson's team are physically stronger and although Barcelona have best eleven in the world, the squad of Manchester United is much better."
The two-time Champions League winner also analysed the main protagonists in the match, and highlighted the roles of Wayne Rooney and Cristiano Ronaldo.
He continued: "Cristiano is amazing, very strong and fast. Physically he is better than the rest.
"Rooney in the first game played as right midfielder, and I think [on Tuesday] that will be the case."