Johnston, who won five league titles with Liverpool in the eighties, believes Terry should walk away from England, paving the way for Manchester City fullback Wayne Bridge to play for Fabio Capello's side this summer.
"My immediate reaction as a 50-year-old former footballer is that you look back on your life's crowning achievements and what you could have done and the pain this man must be going through, to make a decision not to go to the World Cup and play for England, because he can't bear the sight of this guy [John Terry]," Johnston told talkSPORT.
"This guy must be killing himself inside. Not only that, but how unselfish is he? Divisive was the word he used. Of course it's divisive. If John Terry were a man of course he would stand up and say 'I won't go.' He's the one that's caused all the problems.
"Why should Wayne Bridge have to suffer not only the humiliation of what's happened, but also the fact that this is his big moment? I think if John Terry did that that would show some team spirit.
"In football they can all kick a ball. They can all run like professional athletes. Football is all about team spirit. At that 99% top- level, you're looking for people that will pull their heart out for each other. You can't have someone in the dressing room that's sleeping with his best mate’s wife.
"It goes back to the Bible days; thou shalt not covet thy neighbours' wife. You can't do that stuff and pretend to be captain of England, a good guy, when you're a sneaky bugger sneaking around doing that stuff. John Terry's got a lot of soul searching to do."