The two halves of Manchester face each other at Old Trafford this weekend, with United hoping to close the gap on City to just five points.
Jose Mourniho’s United side have only lost twice so far this season and head into the derby after a resounding 3-1 victory over Arsenal.
Manchester City have been applauded week-in week-out for their performances this season, but Shearer says that the attacking displays from United over the past weeks prove that they are still contenders for the crown.
"There is a real spirit about this Mourinho side after some difficult years since Sir Alex Ferguson retired," Shearer said in his column in The Sun.
"This was as good as we have seen since then and will give supporters great hope for the future."
But Shearer insists that anything less than a win against City this weekend will leave hopes of United finishing the season as champions in severe crisis.
"Lose to City and much of that hope will be extinguished. Win and their tails will be up. It’s a huge occasion."
Going into the game, United will be without Paul Pogba, who was given a straight red card against Arsenal last weekend.
United’s club record signing was sent off for a reckless challenge on Hector Bellerin, appearing to stamp on the back of his knee during a rash attempt to win the ball.
Pogba will now miss the City clash, as well as the following two fixtures against Bournemouth and West Ham.
Pogba was in danger of further punishment after sarcastically clapping referee Andre Marriner after the red card, but the FA have said they will not be extending the ban, despite the show of dissent.