City fell 14 points behind Liverpool in the race for the league title after losing 2-1 to Manchester United at the Etihad Stadium on Saturday.
The Citizens have won the top flight title for the past two seasons, and became the first side to complete a clean sweep of all domestic cups in England last season.
Manchester City have failed to translate their domestic dominance into Europe as they are yet to proceed beyond the semi-finals of the UEFA Champions League.
Under the tutelage of Guardiola, Manchester City have lost out to Liverpool and Tottenham Hotspurs in the quarterfinals of the Champions League for the past two seasons while AS Monaco eliminated them at the round of 16 stage in the former Barcelona manager’s first season in charge.
City boast one of the most expensively assembled squads in Europe but Guardiola does not believe his side still has what it takes to conquer Europe.
"This is the level we are facing, against Liverpool, [Manchester] United, Barcelona, [Real] Madrid and Juventus," he told reporters.
"They are the teams we have to face, and the reality is maybe we're not able to compete with them.
"Okay, so we have to improve and accept it and move forward. I could come here and complain about many things; I have reasons to complain.
"Maybe we need as a club to accept the reality we have right now and improve."
City face Dynamo Zagreb in their final champions league group stage game with qualification to the knockout stages already guaranteed.
