"For me Rio should still be in the squad," said Pallister, who won 22 caps between 1988 and 1996.
"You have lost a vast amount of experience with John Terry's retirement and I think that Rio still has a lot to offer the England cause.
"Without John Terry and Rio we lack an authoritative figure in that back four - we didn't look so great at the back in the last internationals.
"Gary Cahill is playing at the top level with Chelsea but has still got much to learn, Joleon Lescott is no longer playing in some of the big games for Manchester City and that makes you wonder if (City manager Roberto) Mancini trusts him fully, Phil Jagielka has been spasmodic in the games he has played for England and Ryan Shawcross is unproven at that level.
"Time will tell whether they can answer the questions being asked of them - I hope they can but in the meantime why not bed them in with the experience of someone like Rio?
"I think considering Rio's experience we've put him on the international scrapheap far too early."