The Italian believes the Merseysiders are well capable of qualifying for the Champions League and feels City will have to be at their best to avoid slipping up.
The champions can ill afford to drop many more points as they seek to pull Manchester United back at the top of the Barclays Premier League.
Liverpool's recent run of good form was undermined by their shock loss to Oldham in the FA Cup last weekend but they responded with a positive display in a 2-2 draw at Arsenal in midweek.
That has ensured they remain firmly in contention to finish fourth, which would fully vindicate manager Brendan Rodgers' methods after an at times difficult season of transition.
Mancini said: "When you want to change it is difficult sometimes.
"He (Rodgers) did some good results but Liverpool is always a strong team.
"I watched the game against Arsenal, they played well.
"It will be a dangerous game on Sunday. If we want to win, we should play well and score when we have a chance."
Liverpool have lost just one of their last five Premier League matches, to United.
The Oldham result aside, the Reds seem to have recovered well after defeat at Stoke on Boxing Day and Mancini would not be surprised to see them make the top four.
He said: "Yes, if they continue to play like in the last month, because they did well."
City will again be without captain Vincent Kompany, who is still troubled by a calf strain and may not return until after the FA Cup fifth-round clash with Championship side Leeds in a fortnight.
Matija Nastasic, who made the bench for the midweek draw at QPR, is hoping to be fit enough to return to partner Joleon Lescott in central defence after a knee problem.
If not, in the continued absence of Kolo Toure due to the African Nations Cup and Micah Richards because of injury, midfielder Javi Garcia may again have to deputise at the back.
Yet despite these defensive problems, City have restored some of the solidity for which they were renowned during last season's title-winning campaign over the past month.
Having found clean sheets hard to come by in the early part of the season, City have kept six in succession in all competitions and not conceded in 555 minutes of action.
Mancini said: "I think we have improved a lot with our defence because all the team works hard, but it is important to keep this and to score also."
Goalscoring has been a concern for Mancini throughout the campaign and his options up front were reduced this week when the sale of Mario Balotelli to AC Milan was sanctioned.
The problems were again evident in the goalless draw at Loftus Road and Mancini needs one of his three remaining senior strikers to hit form.
Sergio Aguero, Edin Dzeko and Carlos Tevez have still scored 30 between them this term but Mancini said: "We maybe should have seven to nine goals more."
Alternative forwards include youngsters Marcos Lopes, who scored in a brief cameo against Watford last month, and John Guidetti.
Guidetti is rated highly after a successful loan at Feyenoord last season but the Swede has missed most of this campaign with a leg injury caused by a virus.
When asked if 20-year-old Guidetti could soon be given a chance, Mancini said he was not yet fully fit.
He said: "If John was ready - but in this moment he is not ready to play. Maybe in the next weeks, it could be possible."
City's midfield continues to function without talisman Yaya Toure, who is also on international duty with Ivory Coast along with brother Kolo.
Gareth Barry, who missed the start of the season with the abdominal problem that ruled him out of Euro 2012, has been in fine form but he was overlooked for a possible England return this week.
Mancini said: "I think this is a friendly match and sometimes the manager can decide to use other players because he wants to get to know the younger players better.
"But Gareth is a good player, he's doing very well and he (Roy Hodgson) knows Gareth well.
"I hope maybe next time he can go in the squad."