The former Liverpool defender believes the club should do their utmost to make the England international sign a new deal at the Etihad.
The midfielder is out of contract at the end of the season and is yet to agree a new deal at the Etihad Stadium, leading to him being linked with a number of potential new employers.
However, despite City struggling this season in a hugely disappointing campaign, the England man has impressed throughout, proving to be one of the only bright spots for beleaguered boss Manuel Pellegrini.
As far as Carragher is concerned, the Premier League champions cannot afford to lose Milner given his quality and value to the collective cause.
“I don't think City can afford to lose someone of Milner's quality,” he said.
“He has an energy and athleticism which the Manchester City squad as a whole lacks. If he goes, they'll be losing quite a lot of things he brings to the team.”
The former Liverpool defender also believes that the fact Milner is English is also another plus point to keeping the player at the club.
City’s squad is currently short on home-grown talent and full of foreign stars, but with quota rules set to be even tighter in the future, the club will have to add to their ranks.
In fact, manager Pellegrini has admitted this season that the club will have to look to sign young talent because their current crop of academy graduates are not ready to make the step up, according to the Daily Mail.
“He's English which, in the current climate, means players like him are a requirement,” he added.
“He's versatile, English and his running power, which is something that you would have to level at City - they lack that pace, certainly in midfield areas. It would be a big loss.”