Pep Guardiola's side thrashed Madrid 5-1 on aggregate in last season's semi-finals and Ancelotti called on his players to show more mental strength this time around.
Record 14-time winners Madrid host reigning champions City at the Santiago Bernabeu on Tuesday in a mouthwatering quarter-final first leg clash.
"We played without courage, without personality - courage and personality are fundamental in this type of game, we lacked them in the second leg," Ancelotti told a news conference.
After a 1-1 draw in the Spanish capital Madrid crumbled to a bruising 4-0 defeat at the Etihad Stadium.
Ancelotti said his players have to be mentally strong against City but admitted he was nervous before the game.
"The important thing is to be at our best, the mental aspect is very important," continued Ancelotti.
"In terms of courage and personality, we've had time to prepare for the game, we've prepared very well, and I am confident that we will give our best and we've got the quality to compete."
Despite having won the competition four times, twice with AC Milan and twice with Madrid, more than any other manager, Ancelotti admitted his own tension before the clash.
"(I'm) very nervous, before a game on a personal level it's all suffering," said the coach.
"Defeat is suffering and victory is relief, not happiness... suffering and stress keep you alive, it's gasoline for me."
Last season Madrid defender Antonio Rudiger kept Erling Haaland and his team-mates relatively quiet in the first leg but Ancelotti did not start the German in the Etihad thrashing.
"(The first leg) was a good game and we stopped Haaland getting passes," Rudiger told reporters.
"The coach didn't apologise (for dropping me) and doesn't need to, I accept it, even though it was hard to accept.
"Now for this game the plan is to try and control dangerous players like Phil Foden, (Kevin) De Bruyne and, of course, Haaland."
Rudiger said he would go at the battle against the Norwegian hitman with everything he has.
"It's about the team, but I will take that duel as if it's personal, as a defensive player against a super striker like Haaland," he added.
