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.

Apple was sued in 2014 for allegedly using a technology developed by a professor and his students in its iPhone chips without the University of Wisconsin-Madison's permission.
Apple was ordered to pay about $234m (Â£179m) when it lost the patent case.
That sum has now been more than doubled because it continued to use the tech.
The judge said that additional damages and interest brought the sum owed to $506m.
However, Apple still hopes to overthrow the fine by appealing against the original jury verdict.
The penalty is still less than the $862m the university had originally sought in damages.
That is because Apple was found not to have deliberately infringed the university's microchip technology.
The patent in question outlined a way to boost computing performance by predicting how processors are about to be used.
The original case covered Apple's use of the invention in its A7, A8 and A8X processors, which are found in devices including the iPhone 5S and the iPad Air 2.
Apple did not re-engineer the chips after losing the dispute in 2015 nor pull the relevant products from sale, and thus became liable for the additional payout.
The university is also seeking further compensation for Apple's continued infringement of the patent in its A9 and A9X chips, which power its iPhone 6S and iPad Pro models.
However, the follow-up legal action has been put on hold until Apple's appeal has been considered.
Former Labour minister Kim Howells has said the party is in the "deepest crisis" he can remember.
[NEXT_CONCEPT]
A US judge has ordered Apple to pay more than half a billion dollars to a university after the tech firm failed to abide by an earlier court ruling.