The champions would fall 10 points behind Jurgen Klopp’s leaders if the Reds win Thursday’s eagerly-anticipated encounter at the Etihad Stadium.
Questions are being asked of City after they suffered three defeats in the space of four games in December but Guardiola is not entertaining the prospect of another loss.
Guardiola said: “The reality is clear, we are seven points down. I have the feeling it is a big opportunity for us to reduce the gap.
“We are going to focus on what we have to do to win the game. Everyone is talking if we lose, but what happens if we win? We are going to try to make our game and to fight as far as possible for our chance to win the Premier League.”
While City have stuttered in recent weeks, Liverpool have been in fine form, winning their last nine games. They thrashed Arsenal 5-1 in their last outing and Guardiola claims City are the underdogs.
He said: “It is Liverpool, with (Manchester) United, the best team in England in history. But we can beat them.
“I know today nobody trusts us, nobody makes one coin for us, but it is what it is. They are at the moment the best team in Europe, in the consistency, the way they control the details in their game. It is a good challenge for us if we’re going to reduce the gap.”
Liverpool beat City in three of their four meetings last season, including both legs of their Champions League quarter-finals.
Guardiola said: “I cannot figure out that what happened in the past is going to happen in the future. Every time we won a lot of games it doesn’t mean it will happen in the future.
“I have a feeling everyone can beat us but also that we can beat everyone. Last year we beat them 5-0 here – but it doesn’t count now.
“Of course if we win we will have more confidence, we will be happier than if we lose. We know exactly which opponent we play, the respect we have. That is the challenge.
“If we want to grow like a club, like an organisation and like a team, we have to face these kind of games with the pressure that means.”
City have a doubt over playmaker Kevin De Bruyne, who missed Sunday’s victory at Southampton with a muscle injury.
Guardiola, speaking at his pre-match press conference on Wednesday, said: “He trained today but tomorrow we need another check in the morning – but he is much better.”
City’s recent form has brought speculation they may seek to reinforce their squad in January but Guardiola continues to insist there will be no signings.
He said: “It’s the third time I answered that question. No news is good news, so no. Maybe tomorrow I change my opinion but today no.
“I am glad with the players I have, they can play in different positions. We are going to live with that situation.”