With Chelsea suffering a shock defeat to Crystal Palace on Saturday and then City being held to a 1-1 draw at Arsenal, Liverpool moved two points clear at the top of the Premier League with a thumping 4-0 win over Tottenham at Anfield on Sunday.
City are a further two points back in third place but, with two games in hand, Mills believes Manuel Pellegrini's side are still in the strongest position of the title chasers.
He told Sky Sports News Radio: "Manchester City are still the favourites. If they win their two games in hand they go top of the league.
"Liverpool have two very tough games against City and Chelsea. If they win both of those then they become the firm favourites but until that point I still think Manchester City are in the box seat.
"You expect them to win their games. There is a little more pressure but Manchester City have the opportunity to get six points from those two games in hand.
"I'd rather be in their position at the moment with the strength of their squad and the belief that they have. They're going into these games believing that they're going to win them both.
"Manchester City have been there before, they've been on this chasing run, they know what it's like, they know what it takes.
"Of course at some point a team has to win it for the first time, and Liverpool have that opportunity. Can they deal with the pressure? Only time will tell."
Listen to Mills' full interview, including his thoughts on the weekend's big games, via the Soundcloud player below.