Isco made his Spain debut in Wednesday’s 3-1 win over Uruguay and has played 54 times in La Liga for the Andalusians.
And Valdano insists he needs to leave the club in order to fulfil his potential.
"Isco is a player who has interesting qualities and is a perfect representation of the Spanish style." he told reporters.
"I think he should get out of Malaga and move to a higher level club. It is time to leave and go to one of the truly great teams for a player of his calibre."
Valdano also believes that the current financial situation at Malaga could well mean they have to sell the Spain international.
"Their economic problems cannot be disguised. I think this summer will see Isco move away from Malaga."
Isco recently signed a new contract with Los Boquerones which ties him to the club until the summer of 2016 and has a buyout clause of €35 million.