Butt, the former Manchester United midfielder who is now their academy manager, laid down the challenge to the club’s owners and his own boss, Jose Mourinho.
United were thumped 3-1 by Manchester City at the Etihad on Sunday, leaving them 12 points clear of Mourinho’s team at the top of the Premier League.
And Butt, who in 12 years at Old Trafford won six league titles, the FA Cup three times and the Champions League, said: “We have got a challenge on to get back to where we want to be, which is the biggest club in the country, and also in the city.
“That challenge is there for the owners, the board, the manager and the club in general to get to where we want to be. And to be honest we have got a challenge on our hands to get there.
“Every now and again you come up against a team that are too good for you. It happened to us at United when we were a team that were wanting to do well in Europe, we came up against Juventus, who were superior to us, and beat us every time we played them.
“Every now and again you have got to hold your hands up and say they are a better team than us, better players than us. City are too good for every team in the Premier League, and as good as any team in Europe.
“On Sunday anyone who had a bit of common sense knew it was going to be a very difficult game, that United had their work cut out, and every single player had to be at the top of their game to get a result. It wasn’t to be. City were a much better team on the day.”
United were bettered in all areas on Sunday. If a stirring victory against Juventus in Turin last week was a moment of sunlit relief, a crushing derby defeat was like arriving back from holiday to be reminded the roof is still leaking and the garden fence needs mending.
The defence is in dire need of repair as Mourinho tries to find a way back into contention and relevance for a club who have spent upwards of £300million in his time at Old Trafford.
In addition, a lack of creativity and consistency in the midfield, and front men sorely lacking form, continue to hamper recovery efforts.
Mourinho is struggling to manage the inconsistent Paul Pogba, who continues to frustrate for all that he was missed in the derby after picking up a knock in Turin.
Without Pogba, United had no conduit to connect back and front ranks. Marouane Fellaini, Nemajna Matic and Ander Herrera worked hard going backwards or sideways but none of them drove forward.
Fred, a £53m summer signing, looked lively when United entertained in beating Everton last month but has been a peripheral figure since and there are suggestions he is looking for a way out of Old Trafford.
“United can’t transfer the ball from back to front with any sort of penetration,” Gary Neville said when analysing the derby. “One player lacking in quality is OK, but you can’t have three. The midfield are leaving the front three isolated.”
Up front, Marcus Rashford looks short of confidence while Romelu Lukaku is short of goals and match fitness. Only Anthony Martial seems sharp but he cannot rescue the season single-handedly.
The international break comes at a good time for United, after three gruelling away fixtures inside two weekends – Bournemouth, Juventus and City – and appearing mentally jaded at the Etihad.
But it is also true that Mourinho has rarely looked quite so miserable and his mood is reflected in United’s negativity and dour response once crossing the lines.
Statistics may be the resort for people who “do not understand football”, as he pointed out on Sunday, but in this case the numbers do not lie, leaving United and Mourinho under mounting pressure to ensure their season is not a failure.