Republic of Ireland international Dunne joined Villa from City last summer as the world's richest club flexed its financial muscles and he became surplus to requirements.
They are preparing to spend again, with £20million-plus-rated Milner firmly in their sights, although his club-mate has warned the blossoming England midfielder the grass may not necessarily be greener in the blue half of Manchester.
Dunne, 30, said: "Manchester City is a really big club now, but I suppose the problem they will have is they will have a lot of top players - £20million is nothing to them.
"It's just another player really, so it's whether you are going to get enough game time.
"But I am sure with James, he is a very, very sensible fella and very clever, so he will make his own decision."
Milner has established himself as one of the English game's rising stars since his £12million switch from Newcastle to Villa, and the 24-year-old played a major part in the club's sustained challenge for a top-four finish last season.
For that reason, Villa are desperate to hang on to him amid concerted interest, although Dunne knows money could eventually talk.
He said: "That's the big thing. We want to progress as a club, but there are always bigger clubs, I suppose, with more money who can offer him maybe Champions League football, so it will be difficult.
"But if things don't work out and James does have to leave, the manager has been really good in the transfer market and will spend his money well.
"We have already got the likes of Fabian Delph there, who is going to become a really good player.
"As much as we want to keep James, we know we he is a much sought after player and it might prove difficult."