Torres' Reds currently sit top of the Barclays Premier League but United enhanced their credentials with a 3-0 demolition of title rivals Chelsea last weekend.
United can move above Liverpool in the table if they win their two matches this week against Wigan Athletic and Bolton Wanderers- and Torres accepts their arch-rivals are now in the driving seat.
"They're the clear favourites to win the title," said Torres. "We're working hard to compete with them and finish above them and we're on course to achieve that.
"We know it's possible for us to win this season but we have to fight to the very end to do so.
"It's obvious that we know all about them. They are the champions of Europe and the world.
"We know the class they have in their team. They have some of the best players in the world."
Torres, who finished third to United star Cristiano Ronaldo in the race for the FIFA World Player of the Year award on Monday, admits the showdown between the two clubs at Old Trafford on 14th March could prove decisive.
"I think the game at Old Trafford will decide the title," noted Torres. "If everything goes as we expect then we will go there in a similar position to now.
"We will have to play our game to try and get a result in a ground, which in the last few years has not been good for Liverpool."
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