City trail Arsenal by six points but have a game in hand, and victory would cut the gap while ramping up the pressure as the race enters its decisive phase.
Guardiola, however, said there was little room for error, acknowledging that anything less than three points would leave his team facing too steep a climb.
"Yes, obviously," the Spaniard added on whether he sees the game as a final. "If we lose, it is over."
"We are ready"
Despite the fine margins, Guardiola said City are confident, stressing that belief is crucial at this stage of the season.
"If you could buy confidence in a supermarket, we would buy it immediately. It is one of the most important aspects," he told a press conference. "(Our confidence) is good. We are ready."
"A month ago, because we dropped points in moments, I thought we would not be here. (But) we saw the calendar and said, 'OK, we play Arsenal at home for a chance. It is six points. It is not a short distance, but we have a chance to do it.'
"That is the situation we are in. It depends on our behaviour and everything will be said on Sunday. Our fans have sold out. Everything is perfect to play a game."
Guardiola said Nico O'Reilly, who scored twice in City's 2-0 League Cup final win over Arsenal, is fit after he left last weekend's game at Chelsea clutching his left hamstring.
That thrilling victory was part of a solid City run of form including a 4-0 throttling of Liverpool in the FA Cup quarter-finals. They have not lost a league game since mid-January.
City's results have begun to sow unease among Arsenal fans.
"If we play like the second half (of the League Cup final) during 95 minutes and they play like the second half, we are going to win. Well, maybe not because football is unpredictable," Guardiola said.
"I know (Arsenal manager) Mikel (Arteta). They are going to adjust something and we have to prepare to do it. In the end, it is more simple. It is how your players individually win the me-against-you."
Not underdogs
Guardiola insisted City must still raise their level if they are to sustain a title push through the final weeks.
"We need to get even better," he said. "The first half against Chelsea (a 3-0 win on Sunday) was not bad but not great. The first 30 minutes against Liverpool was not good either. The first 30 minutes against Arsenal in the final, they were better.
"You cannot pretend that these kind of teams will be 90 or 95 minutes perfect, but this one aspect is not about the future, present or past, it's about confidence, which is an incredible aspect."
Asked if City are underdogs, Guardiola played down the label. "I understand your message, but maybe we're not," he said. "They have been the best so far, but we want to challenge them.
"I said today to the players, it is just a football game, and we have to approach it like a football game. If you get distracted by emotions, that is how you lose focus."
Guardiola said City remain proud to still be challenging on multiple fronts, even if Sunday's result could prove decisive.
"We will see what happens," he said. "But it is never over until it's over and we are still here. I am proud to be there still challenging them."