The former Liverpool defender thinks the player needs to sign a new deal to save his image in the eyes of the club's fans.
The youngster is yet to sign a new deal at the club despite months of negotiations; with manager Brendan Rodgers confirming last week that talks over a new deal had been put on hold until the end of the season – as reported by the Mirror.
The decision to wait until the end of the season has led some to speculate on whether Sterling will be leaving Anfield in the summer, and Carragher believes the player’s image will end up damaged among Liverpool fans if the current situation is allowed to drag on.
“The fans' frustration comes from his contract situation,” Carragher wrote on Kicca.
“The longer it continues the more frustration there will be and it paints him and his advisors in a bad light.”
The player did little to boost his chances of an improved offer after failing to impress against Manchester United on Sunday.
Louis Van Gaal’s side won 2-1 at Anfield to open up a five-point lead between the two sides as they, and several other clubs, compete for the remaining Champions League places.
Carragher believes that the on-going situation with his contract won’t have helped the player’s performance, but it was actually his deployment in an unfamiliar right wing-back position which likely led to his sub-par display.
"Sterling’s standoff won’t help his performances either,” Carragher added.
“His performance yesterday received a lot of criticism and he was nowhere near his best. He’s never really looked comfortable in that wing-back role. In fairness, no one has apart from Jordon Ibe.”