The 22-year-old is taking the Citizens to a Premier League tribunal after being fined two weeks wages for his poor disciplinary record last season.
It has further fuelled speculation Balotelli could leave the Premier League champions in the January transfer window, with Roberto Mancini using the striker sparingly this season.
Italy head coach Prandelli reckons Balotelli could be best served returning to Serie A in a bid to avoid the former Internazionale striker wasting his talent.
“Mancini is absolutely right. Balotelli must listen to him, I agree with him,” Prandelli told Rai.
“Everything depends on Mario, however. Coaches can try to stimulate and negotiate with you but everything must start from him.
“Returning to Italy could help him. It’s important for him to have continuity, the city or the country is not the problem.”
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