The ex-Pontypridd MP blamed Labour's lack of "radical thinking" for its election defeat.
Mr Howells said the party must have a "radical analysis" of society if it is to increase its numbers in parliament.
But he said Labour had "held the line in Wales as well as anybody did in Britain" and praised the first minister for doing "something right".
He told BBC Radio Wales' Sunday Supplement programme: "It's probably at least as bad as under Michael Foot's leadership when we were in real dire straits.
"If the Labour party doesn't come up with fresh thinking, with some radical analysis of what's going on in society and what people need out of society, it could well dwindle to a very small number of MPs."
Labour won 232 seats in the general election, down from 258 in 2010.
In Wales, the party won 25 out of 40 seats, but had expected to improve on the 26 seats it won in 2010.
Of those seats, it lost Gower to the Conservatives by 27 votes, a constituency Labour had held for more than 100 years.
Mr Howells acknowledged Labour's biggest successes were in the city and coal field regeneration areas.
"If we ever want to be back in government again, we need to win southern England," he said.
He also attacked Ed Miliband for promoting "unmitigated gloom" which he described as "dull, it's boring, it does not inspire anyone".
And he said there was little enthusiasm for the party's new prospective leaders as they were "branded with the Miliband brand".
Labour's next leader, he said, would need to be "much more radical" and "jump a generation of leaders and ideas".
But Mr Howells was more optimistic about the future of Labour in Wales.
He said: "I think Carwyn Jones is a much sharper leader.
"They've proved that they can run a government in Wales and people trust them, that's why they voted for them."
Responding to his comments, Labour peer Baroness Eluned Morgan admitted the party needed a "thorough rethink", but denied claims it was experiencing its worse crisis in living memory.
She said the party needed to readdress the way it approached politics and the way it makes contact with society if it was to move forward successfully.
Former Labour minister Kim Howells has said the party is in the "deepest crisis" he can remember.