The Italian thinks the misfiring Chelsea striker has been on a downward spiral since playing under Rafael Benitez at Liverpool and has also backed Juventus to beat the Blues
The under-pressure Spain international has struggled to establish himself since moving to Stamford Bridge for £50 million (€62m) in January 2011.
Blues boss Roberto Di Matteo recently revealed he is considering dropping Torres for their vital Champions League game against Juventus, with Daniel Sturridge tipped to take his place as the focal point of their attack.
Capello told Italia 2: "Fernando Torres is slowly losing it. I don't know what is happening because he was very good when Rafael Benitez was the Liverpool manager.
“But he has not found inspiration [at Chelsea] and scored the goals that used to distinguish him. Before, he was unpredictable with Liverpool, but now defences manage to beat him for speed and this is worrying."
Chelsea’s trip to Juventus is important to both side’s chances of progressing, and Capello thinks the Bianconeri are capable of beating the current European Champions.
He added: "Juventus can beat Chelsea, they have to pay attention to the three Blues offensive midfielders. [Mirko] Vucinic can make the difference, he's the best Juventus striker but we have to be patient with [Sebastian] Giovinco, he can become like Zola."
The 66-year-old also spoke of his sudden exit as England coach earlier this year, adding: “The reason I left England was to defend Terry. English people are too moralist - they want people to behave in a certain way, and then they take hasty decisions like that [Terry] who was later acquitted.
"My intention is to end my career when my contract with Russia terminates. If there’s an interesting project I could change my plans but nowadays I can't see nothing interesting."