Defending champion City, which beat Southampton 3-1 on Sunday, goes into Thursday's home game against Liverpool seven points adrift of the Reds, BBC Sport reported.
"The problem is the other team is fantastic," Guardiola told BBC Sport.
"[Liverpool are] maybe the best team in Europe or the world right now and in top form."
While City has suffered defeats against Chelsea, Crystal Palace and Leicester in December, Liverpool has won all seven league games it has played.
Liverpool ended 2018 in style, beating Arsenal 5-1 at Anfield to briefly go 10 points clear of City.
Speaking about Liverpool's ability, Guardiola added, "You have to accept it. All we can do is do our job, play our games and after that we will see."
In addition to its dominant position in the league, Liverpool has a recent edge over City because it knocked the Citizens out of the Champions League in the quarterfinals last season.
If the Reds were to win on Thursday, they would restore their 10-point cushion and become heavy favorites to win a first league title since 1990.
City captain Vincent Kompany said the game against the league leader is the type of match "you live for".
"Our pride has been hurt over recent weeks but we have everything to play for. It depends on us," Kompany told Sky Sports.
"Every living soul that comes into the stadium has to be ready to fight and give it to them [Liverpool], and we should be able to pull everything out of the locker for that game."