Nicky Butt has admitted Manchester United face a daunting task to restore themselves as “the biggest club in the country but also in the city” after witnessing the staggering progress made by their rivals Manchester City over the past decade.

United’s academy manager, who won six Premier League titles and a Champions League there as a player, was speaking 24 hours after his club’s 3-1 defeat in the derby. That victory took City, the reigning champions, 12 points clear of United.

“Every now and again you come up against a team that are too good for you,” Butt said at the Premier Sports Network event in London. “It happened to us when we were a team that were wanting to do well in Europe. We came up against a team, Juventus, that were superior to us, and they’d beat us every time we played them. So every now and again you have got to hold your hands up and say they are a better team than us, [have] better players than us, and are too good for every team in the Premier League, to be honest. They are as good as any team in Europe.

“Anyone who had a bit of common sense knew it was going to be a very difficult game on Sunday and that we had our work cut out, and that every single player had to be at the top of their game to get a result off that team. It wasn’t to be. They were a much better team on the day. For Manchester United now we have got a challenge on to get back to where we want to be, which is [to be] the biggest club in the country, but also in the city. So that challenge is there for the owners, the board, the manager and the club in general to be where we want to be. And, to be honest, we have got a challenge on our hands to get there.”

As a member of the celebrated Class of 92 Butt is now charged with bringing a new generation of players through United’s youth system but the 43-year-old has witnessed City’s rise since the Abu Dhabi takeover in 2008.

“I remember in the local area when the rumours started about them buying a lot of land in the east Manchester area and looking to build this massive complex, like a little mini city within the city, and you don’t think it is going to happen,” Butt said. “Before you know it, it’s there and you think: ‘Very impressive.’

“It might not be everyone’s cup of tea, but you’ve got to admit it is an impressive place to be. And they are winning things. Their next challenge is the European Cup because, until you win the Champions League, you can’t really be compared to the best teams in Europe. That’s their next challenge.”

United are in discussions with Antonio Valencia and Ashley Young regarding new one-year deals, with the players’ contracts due to expire after this season.

Valencia and Young, both aged 33, have captained United during this campaign from the full-back positions. Young has worn the armband in recent matches because Valencia is recovering from mouth surgery.

Valencia has been at Old Trafford since 2009 and Young joined two years later. José Mourinho is keen for both to stay.

Young is enjoying a late-career renaissance, becoming a regular at full-back. Last season he was the first-choice left-back and he is currently the regular right-back in Valencia’s absence.

United’s Paul Pogba and Anthony Martial have pulled out of France’s upcoming internationals because of injuries.