Sancho has been linked with a move to United throughout the transfer window, which is open for three more weeks, after another impressive campaign last time out.
Dortmund sporting director Michael Zorc informed the Premier League side last month they have no chance of signing the attacker after their deadline of August 10 had passed.
United are reportedly still attempting to agree terms with the player and club, but Favre has made clear that Sancho is a key part of his plans for the upcoming campaign.
“We need him, no question. Everyone was happy he stayed,” Favre told Swiss news agency Keystone-SDA. “We don’t need to talk long about his qualities – they are enormous.
“He scores and sets up a lot of goals and can often make all the difference, but there are some details that Sancho needs to improve. That is quite normal for a 20-year-old.”
Dortmund have another exciting young English talent in their ranks this season following the arrival of Jude Bellingham from Birmingham City in July.
Bellingham has settled in well with the Bundesliga side and Favre has high hopes for the versatile midfielder, who cost a reported €25m (£22.75m).
“Of course I’m looking forward to working with a player like him,” he said. “I got to know him better during pre-season. I like how he handles the ball and how he can defend it.
“Jude possesses many tactical options and an amazing presence. He can play as a six or eight, plays good passes, seeks completion.
“Various systems are possible with him. It’s all very, very interesting.”
Dortmund kick off their 2020-21 campaign on Monday with a trip to MSV Duisburg in the first round of the DFB-Pokal.