The Scottish giants were stunned by an early strike from English teenager Jack Wilshere and a killer finish by Croatian Eduardo, with Wilshere then completing the rout with 18 minutes left.

Rangers only showed some decent form in patches, most notably after the break following the introduction of Nacho Novo.

However, Smith maintains such challenges are ones his men must rise to if they are to have an impact among Europe's elite clubs.

"Having missed out on Europe last season, today was a sharp reminder to our boys of what we come up against at the top level of European football," he said.

"It is not very often we come up against a team who play in a manner which Arsene Wenger has them playing.

"They were excellent in terms of possession and speed.

"We had a very long afternoon in the dugout."

Smith maintains the Gunners have what it takes to challenge for honours in the coming season.

"It is not surprising to see Arsenal get to the semi-finals of the Champions League when you see the level at which they play," he said.

"I keep reading newspapers saying they should be spending money and bringing in other players.

"Well, the two Arsenal teams I have seen playing over the weekend would be sufficient for me to say they will put up a good enough challenge in all of the competitions they are involved in this year."

Despite the gulf in class between the two sides this afternoon, Smith - who had a four-year spell in charge of Everton - maintains both Scottish giants could hold their own in the Barclays Premier League.

"Rangers and Celtic have reached the final of the UEFA Cup in the last 10 years where only one English team have," he said.

Smith was not quite right, given Arsenal (2000 runners-up), Liverpool (2001 winners) and Middlesbrough (2006 runners-up) have reached the UEFA Cup final recently.

However he has no doubt the Old Firm would avoid being whipping boys in England.

"The level of Manchester United, Liverpool, Arsenal etc is not to be compared to the Scottish league - if it was, there would be something wrong with your league and not ours," said the Rangers boss.

"There is a huge disparity at the top level, but not at the other level from a Rangers and Celtic perspective, it is not there.

"But it is also among the English teams. If you take away the top four or five, I do not think the rest of the league play to a similar level to them."

Smith, meanwhile, refuted claims teenage forward John Fleck was dropped to the reserves following a bust-up with assistant boss Ally McCoist.

The 17-year-old was not in the Rangers squad for this weekend's Emirates Cup, instead playing for the club's second string in Northern Ireland.

"That is not the case. I left him out for another reason," said Smith.

It is believed that Rangers dropped Fleck because of concerns over his attitude.

Smith added: "He has been off playing with the reserves in Northern Ireland, and it has nothing to do with that.

"I made the decision to leave him out."