The former Liverpool defender believes that the current Premier League champions will have to spend heavily in the summer.
City were beaten 4-2 by Manchester United at Old Trafford on Sunday afternoon to continue a miserable run of form which has seen them lose six of their last eight games.
That run of form has seen them slip from second in the Premier League table to fourth, four points behind their fierce rivals sitting in third, while Liverpool and Southampton are chasing them in their desire for Champions League football.
Now, Carragher has said they will have to spend millions in the summer in order to rebuild the team.
“You look at the age of the team and it’s too old, so you need a lot of new blood. It’s going to take a lot of money,” he said. “They’ve been a great team, but that team needs breaking up and changing,
"The criticism I have is for the people at the top to have that much money and to allow yourself to get into a situation where you might need five or six players to go straight into the team.”
The City team has remained largely unchanged over the years, with the likes of Vincent Kompany, Yaya Toure, David Silva and Sergio Aguero all being key players over the years.
However, those higher up the club have failed to add to that core and keep the development going, with signings such as Eliaquim Mangala failing to establish themselves at the Etihad.
Now, Carragher says that they should be applauded for what they have achieved, but every aspect of their game has now gone.
“It’s gone for them now, physically, mentally, every part of the game,” he added. “They’ve been a great team and we should applaud what they’ve achieved over the past three or four years, but it’s the end for this team now. It’s got to be broken up.”