The former Italy boss claims the striker must learn from his past experiences and feels Serie A sides are getting their priorities wrong
Balotelli netted the winner in Italy's 2-1 World Cup win over England, but failed to make an impact in the defeats against Costa Rica and Uruguay and was heavily criticised for those performances as the Azzurri crashed out of the group stage.
"Balotelli is a good guy, really. He is not a bad person," Prandelli told Corriere della Sera.
"But he lives in a dimension that is far away from reality.
"That doesn't say anything, though. He is only 24 years old and has the possibility to build on this experience."
Prandelli then went on to stress that Italy's biggest problem is that clubs care about their own interests more than those of the national team, whereas world champions Germany benefit from an entirely different mindset.
"When Germany were in trouble, they asked themselves the question which team was the most important. Their answer was Germany and not Bayern Munich or Borussia Dortmund," he continued.
"In Italy only 38 per cent of the players are Italian. Juventus have six foreigners in their starting XI. I have told the clubs to focus on their youth players, but if even those teams are full of foreign players...
"The most important team in Italy is not Juventus, Roma, Inter or AC Milan, but it's the national team. That's the only way to get ready for major tournaments."
The newly-appointed Galatasaray boss acknowledged that he was ultimately responsible for Italy's poor World Cup campaign, however.
"The project simply didn't work in Brazil. We tried to play in a certain way, but we did not succeed," he added.
"We should have caused Costa Rica problems with our strategy, but we were unable to do so. This was the responsibility of the technical staff and we failed. Period. That's my responsibility."