Balotelli is on the verge of joining the English giants from Milan for a reported fee of £16 million.
And while McAllister, who won five trophies at Liverpool towards the end of his glittering career, acknowledges the fee is not high for a player of Balotelli's calibre, but is worried about the potential for a dressing room split.
Balotelli courted regular controversy during an incident-packed spell at Manchester City prior to his return to Italy, and McAllister is not convinced the move is a good one for his former side.
"It will split everyone," McAllister told talkSPORT.
"He's got great ability, but Liverpool are very much together under Brendan Rodgers and it doesn't take a lot to split a dressing room.
"That's my only fear. I'm not so sure [about the move].
"Look at his moves – he's had great opportunities at big clubs and that fee keeps dropping and dropping.
"It's not a great deal of money in today's game, but it will split a lot of people."
McAllister also thinks Balotelli's arrival could cause a selection headache for Rodgers and potentially disrupt star striker Daniel Sturridge.
"I don't know where Balotelli plays [at Liverpool]," he added.
"If he plays up top, does Sturridge move to the side? I don't think he likes it out there.
"He [Balotelli] is not going to be second fiddle – that's not his thing.
"I'm looking forward to seeing how they line up with the three or four really attacking players they've got."
