The two teams confront each other at the Bernabeu in the Primera Division on Saturday evening with the Catalan visitors eight points clear at the top of La Liga.
A victory for Barca will virtually see them win the league, but Guardiola claims Jose Mourinho’s team will be starting as favourites to win the encounter.
“I have always thought very highly of Madrid,” said the Barca coach to Spanish sports daily Marca. "This Madrid is better than the one we played before and they start as favourites.
“If we lose at the Bernabeu, there is a long way to go in the league but to win the league we have to win at the Bernabeu.”
Guardiola showed respect for the Madrid team and warned that his side would have to be careful of their strengths.
"The Madrid players shoot more, jump higher and are quicker and stronger than ours,” said the 40-year-old.
“I have never seen a team that plays in space like theirs - in three touches they have already reached the goal. We need to move the ball from [goalkeeper] Victor Valdes to create a chance, they just need three seconds.”
Barcelona’s morale has been raised by the return of centre-back Carles Puyol but Guardiola is not certain whether to start him.
"We have several problems in defence and this [Puyol's return] is good news, but he has not trained much. He told us he is not in pain, so we will see.”
When asked about his impression of Madrid boss Jose Mourinho not talking to the media in the press conference, the former Barcelona and Brescia midfielder remarked: “Everything I say will be compared with Mr. Mourinho, everyone does what they want in their club, it is not the first time it has happened.
“He has great quality of knowing how to play in different ways, he did it to us with Inter [in the Champions League semi-finals in 2009-10], one style in the first leg and another in the second. He is very skilled in changing his team set-up.”
Guardiola also stated his admiration for Madrid playmaker Mesut Ozil, saying: "We knew what he could do, besides playing well he breaks between the lines, he gets on the back of the full backs and it has pleasantly surprised me how he is coping physically.”
Barcelona and Madrid will confront each other again next week in the final of the Copa del Rey and are also scheduled to play two legs in the semi-finals of the Champions League in the subsequent days.