Cannavaro, who skippered Italy to World Cup glory four years ago, said: "My thoughts are that John Terry won't be on the team sheet.
"You don't cross Fabio and he won't want anybody disrupting his tournament again.
"It was absolutely the correct decision for the English FA to keep Fabio on. He can make this England team his own now - and I would actually make them the favourites for Euro 2012.
"When he joined Real Madrid he brought a lot of players in the first season like myself and Ruud van Nistelrooy and the result was instant success but internationally it takes time to build your own team.
"I don't want to speak for Fabio but I'd be surprised if more than five of the players who started against Germany start the opening game of Euro 2012. For me, the only two players that can be guaranteed to start in 2012 are Ashley Cole and Wayne Rooney.
"By then Fabio will have had enough time to build his own team and I think it will be unrecognisable compared to what it was at the World Cup.
"Spain will be there but if Fabio gets rid of egos, I think England will see exactly why it was a good decision to keep him on."