United were thoroughly outclassed as goals from David Silva and Nicolas Otamendi gave City a 2-1 win at Old Trafford and extended their lead at the top of the table to 11 points, with Marcus Rashford scoring a consolation goal for the home side on the stroke of halftime.
The Red Devils defended deep for much of the game at Old Trafford and attempted to break forward with long balls aimed towards Romelu Lukaku, but the strategy did not pay dividends.
Neville accused United of not showing enough bravery on the ball against the Premier League leaders, despite manager Jose Mourinho fielding an attack-minded starting line-up.
"When you do play a long ball you've got to do it with purpose and get players around the target but United lacked belief, which was disappointing as a fan, but fair play to City for dominating the ball," Neville told Sky Sports.
"I think there was acceptance in the stadium that they were the better team and they could have won 3-1 or 4-1 if they'd kept a centre-forward on."
He added: "I thought [United] lacked courage on the ball and looked timid, not in the sense of work rate but more belief and that was what cost them."
Neville dismissed suggestions that United must invest more in the transfer market to compete with City and said the players already at the club had to deliver more.
"You can talk about buying but the recruitment has to be better," he stated. "I think Jose's has been better than [former United manager Louis] Van Gaal's, but for all the money that was spent on the midfield there was a lack of quality on Sunday and that's not right."
The former England international went on to say that Mourinho was the right man to lead United despite the abject defeat against City.
"United are getting better and there is going to be some patience required," he said.