City suffered two more losses over Christmas but have now returned to the top of the league table, ahead of Liverpool on goal difference.
"At the moment, in my opinion, Manchester City is the best team in Europe," Sarri told reporters on Friday.
"(Pep) Guardiola is in the third season in the Premier League. We have to try to reduce the gap."
City coach Guardiola counted fourth-placed Chelsea among the title contenders this week but Sarri dismissed his team's chances by calling it a two-horse race.
"At the moment, I don't think (we can win the title)," said Sarri. "We will be able to fight for the top four in this season. No more, I think.
"We can win something, of course, but in the Premier League there is a fight between Liverpool and Manchester City."
Sarri was pleased with January signing Gonzalo Higuain's instant impact at Stamford Bridge, scoring two goals in a 5-0 thrashing of Huddersfield Town last weekend.
The Italian coach expects the Argentina striker to build an on-pitch relationship with playmaker Eden Hazard, whose future at Chelsea remains uncertain amid interest from Real Madrid.
"I think Gonzalo is a great player," Sarri added. "He did very well everywhere. In Madrid, in Naples, in Milan. Maybe not very well in Milan, but he's a great player and I think he's very useful for Eden.
"They are really very suitable to play together, I think. It's very important for us he's determined. I think the impact with other players will really be very good for us."
(Reporting by Hardik Vyas in Bengaluru, editing by Ed Osmond)
