The Hollywood star, who is a minority owner of the UFC, told TMZ reporters that he thinks the Irishman should focus his negativity to fuel an epic comeback.
McGregor was taken into custody in Miami, Florida, recently after allegedly smashing a fan's phone.
When asked what punishment the UFC should give to the 30-year-old, Stallone said he should be "inspired" by his recent troubles.
"(He should tell himself) 'Okay, I've gone through a very rough time. I've been somewhat publicly humiliated. I'm at a crossroad in my life... I have to overcome an incredible opponent who seems invulnerable,' " "The Expendables" star added, alluding to McGregor's controversial loss to fellow UFC fighter Khabib Nurmagomedov.
"This is a crossroad in his life. This is probably the most important one because if he doesn't live up to his ideal... if he can't overcome his fear and beat this man, I think it'll plague him for the rest of his life," Stallone added.
McGregor lost to Nurmagomedov back in October (2018), in a match that quickly escalated into a brawl between the fighters and their respective teams.
"I think he lost last time because he got resentful, he got prideful, he got arrogant... put his hands down... he walked right up to that gentleman and he just got smashed in the face when he could have been defensive. There was no Plan B. Not even a Plan A minus," Stallone mused.
"He showed how special he is, and then he met his match. So now, you have two UFC gods, going at one another. And win or lose, it's how you lose," he added, before revealing he wanted to see a rematch between the two Irishman and the Russian.
"I wanna see a guy that leaves everything on the table," he said.