Chelsea are nine points clear of their London rivals after a 3-0 victory at West Brom.
Arsene Wenger's side lost at home to Aston Villa on Saturday but Terry insists they remain a title threat along with Liverpool and Manchester United.
Luiz Felipe Scolari's side host Arsenal at Stamford Bridge on Sunday week and go to the Emirates Stadium in May, and Terry says Chelsea will have to win both games to stay ahead of the Gunners.
"I still consider Arsenal a contender, you should never write off the big sides," said Terry. "They have the players to do it and they will put a run together.
"We still have to play them at home and away and anything can happen. We have to make sure we pick up the six points against them in those two games.
"It is really close at the top at moment. Liverpool are playing well. I watched them before we played West Brom and Manchester United had a good result against Stoke.
"The main thing for us is to keep winning and try and frustrate the teams below us. We have experienced that in chasing Manchester United the last couple of years. It does get to you.
"They had the advantage of a better goal difference on us before but we have it now. If we can keep scoring and not conceding it's like another three points."
Rejuvenated striker Nicolas Anelka scored twice against Albion to take his tally for the season to 13, but defender Jose Bosingwa began the rout with a stunning long-range effort.
The right-back, who joined the club in a £16.2million move from Porto in the summer, has been hailed as a top addition to the squad by Terry.
"He is one of the best signings of the year," he added. "He gives us a lot going forward and can defend.
"He has a great left and right foot and he shows that in training. He scores goals and is so quick people find it hard to get by him."
Meanwhile, shock England new boy, Chelsea's on-loan defender Michael Mancienne, says Terry's rise from Chelsea youngster to England captain has provided him with massive inspiration.
Both players came through the youth ranks at the club and both had to go out on loan to gain first-team experience - Mancienne at QPR and now Wolves while Terry went to Nottingham Forest.
But Mancienne, 20, earned a call-up to the England squad two years quicker than Terry and his chances of playing against Germany may increase further if the England captain pulls out with a foot injury.
"I have played with John Terry before in training at Chelsea and our games compliment each other because I'm a different kind of defender," said Mancienne.
"I model myself more on Ricardo Carvalho and Rio Ferdinand because of the way I play. My tackles are all about timing and I like to get my foot on the ball.
"The game has just come naturally to me, I used to play in midfield so when I went to the back I had a lot of confidence.
"John is captain of the full national side and is someone I look up to. He plays a big part in my belief that I can make it in the game because he made the breakthrough.
"He started out at Chelsea having to compete with Frank Leboeuf and Marcel Desailly who had won the World Cup with France and look where he is now."
A few weeks ago Mancienne admitted that he may have to leave Chelsea for the good of his career, but his England recognition has provided him with fresh optimism that he can make an impact under Scolari.
He added: "I was on the bench for Chelsea a few times, but I haven't played a first-team game for them yet. Long term I would like to go back there, because I have been with the club since I was eight.
"But I am at Wolves until the end of December and I don't know if the loan deal will be extended.
"I would like to think that one day I can play regular Premier League football, but being at Wolves is a great stepping stone.
"The move to Wolves, the fact they like to play good football and are top of the Championship, has definitely helped me get selected for England."
Meanwhile, Chelsea midfielder Frank Lampard has been forced to pull out of the squad to face Germany with a rib problem.