Souness insists Liverpool are the better club.
"There is no better football club in England than Liverpool," he told Sky Sports News.
"There is no better group of supporters than they have at Liverpool. For me - and I know I'm totally biased - but I go to these big modern stadiums throughout the country and Liverpool still generates the best atmosphere. I think the supporters are more understanding than anywhere else.
"For me he should stay at Liverpool and be a company man and try to get them into the Champions League. His goals would go a long way to helping them do that.
"I would fully understand it if Real Madrid came knocking and he really dug his heels in and said he'd got to go because it's a chance to go back to a Latin country.
"Real Madrid are, right now, arguably the biggest club in the world and that I could understand and live with that.