Terry announced his international retirement last month due to the FA's hearing into his onfield incident with QPR defender Anton Ferdinand, and Waddle believes Three Lions boss Roy Hodgson could turn to the Reds skipper as a potential replacement.
Speaking to ESPN, he said: "[Gerrard] is good enough to convert to a centre-half. He's competitive, he reads the game brilliantly and he has a terrific range of passing.
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"Instead, we get a player, put him in a position then say: 'He's tired now, he hasn't got the legs, get rid of him.'"
Waddle likened the possibility of moving Gerrard back from his usual midfield slot to that of ex-Tottenham and England team-mate Glenn Hoddle, adding: "You wouldn't say Glenn Hoddle is a physical player but he did it.
"You might get muscled out of a tackle, you might lose a 50-50 but, in modern football, the aggressive centre-halves, the bully boys with split eyes, have gone.
"You tackle once, it's a yellow; the second tackle you're gone. You want players who can intercept, who can read the game and nick the ball."
Gerrard will miss England's 2014 World Cup qualifier against San Marino at Wembley on Friday after being red carded in his last match for his country against Ukraine.