The peer said extending devolution rather than a break-up of the "family" of the union was the way forward.
He also argued the costs debate was "irrelevant" as the discussion should be about the type of nation Scots want to live in.
Lord Steel, who believes people are "fed up" hearing about the issue, told BBC Radio 4's Today programme: "We have always stood for effective devolution, there's more needs to be done to improve the powers of the Scottish Parliament but that doesn't mean we go independent.
"The general feeling in Scotland is we have not finished the devolution process. We need to get the Scottish Parliament having tax raising powers to raise the money that it spends."
Asked about the costs of separation, he said: "My view very simply is that if it is the right thing to do to go independent then the cost is irrelevant.
"Divorce is always an expensive and messy business and this would be no exception. But I think it is the wrong thing to do and therefore the argument of what it is going to cost is not the real argument. It is what sort of country do we want to live in?
"I don't think we want to live in a country that breaks up the family of England, Scotland, Wales and Northern Ireland. A very successful union."
But pushed to comment on the economic argument, he said: "The Scottish Government hasn't really come up with detailed figures. There is a lot of optimism about North Sea oil, productivity will be up and so on.
"This is all pie in the sky. I think the costs of separating are not known. It is uncertain, it is a leap in the dark."
He also said independence risked damage to the rest of the UK, which had stood together in "good times and bad", adding: "That is something that we in Scotland value."
Lord Steel, who is hosting a meeting with Shirley Williams tonight, became the co-chairman of the Scottish Constitutional Convention in 1989. It created the blueprint for Labour's Scotland Act in 1998.
He was also the first presiding officer of the Scottish Parliament, a post he held until 2003.
Scottish independence has dominated the headlines on and off for the last three years but the formal campaign, governed by the usual election rules, begins today.
Stephen Noon, chief strategist for the Yes campaign, agreed with Lord Steel that the debate was about more than money and said the main drive was a desire to turn Scotland into a better country that makes more of its potential.
He also told BBC Radio 4's Today programme: "There is no separation on offer here. What we are looking for is a new partnership, a more modern relationship. The strong bonds of family, culture and friendship will remain.
"The social union will flourish after a yes."
Asked about the risk of damage to the rest of the UK resulting from independence, he said Scotland would look to follow the Scandinavian model.
"That is the model for a more modern partnership," he said. "The whole of the UK would benefit from ending the current sclerotic Westminster system."
He dismissed the No campaign as "a rather depressing vision of yet another decade of constitutional debate in Scotland" and claimed it could not offer what the country needed in terms of tax and welfare powers.
"Let's just get on, take the powers and change our country for good," he said.