Navratilova said she expects the American to equal her total of 18 Grand Slam singles titles at the Australian Open starting in Melbourne this month and go on to better Graf's record of 22.
"If she can stay healthy there is no doubt she can go into the 20s. The sky is the limit," Navratilova told reporters in Adelaide.
World number one Williams has so far won 17 Grand Slam titles. Only Navratilova and Chris Evert (both with 18) and Graf have won more majors in the Open era.
"I know how hard it is once you get to 30, all those little niggling injuries get worse and it's much easier to have an off day," Navratilova said. "Yet she seems to be playing her best tennis right now."
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Williams is the favourite for Melbourne after beating rival Victoria Azarenka 6-4, 7-5 in the final of the Brisbane International on Saturday.
Navratilova, playing in the exhibition World Tennis Challenge this week in Adelaide, said Williams was showing no sign of decline.
"But still, she is in her 30s... She is eager and winning is very contagious. Once you get really used to it, you don't want to let go of it."
Former world number one Tracy Austin, also in Adelaide for the World Tennis Challenge, said Williams appeared motivated by surpassing Graf's record.
"I love the fact that she's 32 years old and still seems to be as hungry, if not hungrier, than she has ever been," Austin said. "At 32, and realising that she is towards possibly the end of her career, she is now playing for history.