"Rather than looking up we're in a real dogfight and that's me being honest," Neville told BBC Radio Merseyside.
"The incentive before the game was to get the three points and shoot up the league to eighth position. That performance wasn't up to scratch."
Before Sunday's game at the Reebok Stadium, the squad had to deal with the news of injuries to in-form striker Louis Saha, who scored four goals against Blackpool, and midfielder Jack Rodwell.
The former England international is not using the absentees as an excuse for their latest setback.
"You get injuries, you've got to deal with it and we've got a [good enough] squad," Neville added. "The manager put a squad together at the beginning of the season and you've got to deal with it.
"It's all part and parcel of football."
The Blues now have a break from the league, as they prepare for their FA Cup fourth round replay with Chelsea at Stamford Bridge on Saturday, with Neville seeking a response.
"We're all disappointed but there is no better cup competition to lift yourself in and we need to salvage something from the season.
"We've got confidence going down there and we've got a good record down there. There is no better way to get out of this disappointment."
Source: BBC Sport
Source: BBC Sport