Morley, 55, part of the team that won the League title in 1981 and European Cup in 1982 also believes Milner should "show some loyalty" and turn his back on any lucrative move.
"Martin is in a catch 22 situation. His best player has been offered a massive amount of money but will the club replace him with anyone better?
"The manager has to balance things between keeping his best player who may become unhappy against selling him and making a lot of money for new signings. You don't always know what you are getting with new players - but at least he knows what he is getting from James Milner.
"The bottom line is whether Milner really wants to stay and if he doesn't, do Villa want an unhappy player at the club?"
He believes Milner needs to show more respect to Villa, who gave him his big break when he was still a bit-part player at Newcastle.
"If I was James Milner I would stay at the Villa and show some loyalty," Morley added. "He was saying he was happy at the club only a few months ago.
"He has had a great season, got in the England squad and now all of a sudden it seems like he wants to leave because Manchester City have come in.
"It is Villa who has put him on the platform he is on now. What has happened to loyalty?"