The Scot cites the league table to support this view, as Roberto Mancini's men have occupied top spot for several weeks now, and have also scored more goals and conceded fewer than any other side in the league.
"They are top of the league," Dalglish said, according to The Sunday Mirror.
"That tells you mathematically they are the best team in the league, but it doesn’t tell you they can’t be beaten."
Liverpool take on City at Anfield on Sunday, with the Citizens not having lost a single game in the Premier League so far.
But the corresponding fixture last season saw the Reds triumph 3-0, with an Andy Carroll double and one from Dirk Kuyt securing the three points.
However, Dalglish admits that City suffered when then captain Carlos Tevez succumbed to an injury and had to be substituted in the first-half, necessitating the introduction of Mario Balotelli for the remainder of the clash.
But he insists that Tevez's current banishment will not affect the club because they now have Sergio Aguero, who joined from Atletico Madrid during the summer.
"City have got a lot more points than they had at the same stage last season," said Dalglish. "The fact that they are top of the league means they must be better now than they were then. I remember when we beat them last season at Anfield when they lost Tevez to an injury after about 20 minutes.
"Tevez was a big miss for them that night, but they didn’t have Aguero to replace him. Losing Tevez is a blow, but Aguero has come in and done well so they have just replaced one with the other.
"They have brought someone else in and they will keep doing that if they feel that’s what needs to be done.
"They didn’t have the same strength last season as they’ve got this year."
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