Stones, 24, has enjoyed a fine season at City, building on his outstanding performances for England at the World Cup in Russia in the summer.
He’s established himself as a regular in Pep Guardiola’s side, playing 26 times in all competitions and impressing with his defensive steel and quality on the ball.
Dunne, who spent nine years at City, says Stones has everything needed to reach the very top of the game.
“I think he has the potential [to be world-class],” he says. “When he’s playing with England, they’re helping him by building a side around him.
“He was unfairly criticised when he first came because he was young and he was bound to make mistakes. It takes time to fit into what Pep wants from him.
"But with the benefit of a couple of years he has improved and will continue to improve and there’s no reason why he can’t be one of the best centre-halves in the world.”
Part of Stones’ success this season is down to the partnership he has developed with Aymeric Laporte.
The pair complement each other beautifully: one left-footed, one right-footed, and both exceptional on the ball. They approach the game in similar ways and have established a superb understanding on the pitch.
Dunne feels they are ideal for Guardiola’s possession-based system.
“I think the two of them are very good footballers, very elegant,” he says.
“And of all the centre-backs we’ve got, they’re Pep’s two signings. They suit the style of football he likes, and they seem to complement each other.
“They’re both very calm and take any stress or nerves out of the situation. They just seem to work.
“Stones has got physically stronger during his time here; his concentration has improved and he’s really becoming a top centre-half now.”
Dunne won City’s Player of the Year award for a record four-consecutive years between 2005-08 and made over 350 appearances for the Club.
For much of his time at City, he enjoyed a fine partnership with Sylvain Distin, a classy left-footed Frenchman signed from PSG in 2002.
In a difficult time for the team, they were brilliant, with Dunne’s strength and leadership qualities supplemented by Distin’s elegance and ability to bring the ball out from the back.
There seemed to be an intrinsic understanding between the two, so what makes a good centre-back partnership?
“I think having confidence in one another and believing that you can go and win a ball," Dunne says.
"Knowing that someone is going to be behind you and someone is going to cover you and having that communication.
"Sylvain Distin was playing left-footed and I was playing right-footed, and these two are similar. You're always more comfortable on their own side.
"It’s a small thing but it just gives you a little bit more comfort when you’re playing on that side, whereas it’s easier for you and you can distribute the ball better with that.
"I think the two of them just seem to feed off each other. They spur each other on to get better each week, and that’s important.
"You need to have a friendship, but also a rivalry.You don’t want to be the one that lets the partnership down.”