Walcott's contract with the Gunners expires at the end of the season and the winger has been linked with moves to the likes of Chelsea and Liverpool.
Walcott is yet to start a match for Arsenal since news of his contract stand-off with the club.
"Everyone wants to see Theo Walcott sign a new contract," Parlour told TalkSport. "Heís got a lot of work to do on the pitch though and, at the moment, heís not playing.
"Heís a good player, but he needs to say whether heís staying or heís going and then concentrate on his football.
"All these contract talks can sometimes affect your game. Heís probably thinking more about money and less about his game.
"Itís one of those situations where the player has got to be happy with what heís got. I can never understand these wrangles over contracts.
"Sure you have a figure in your head which youíre happy with and once thatís been agreed then itís done. Whether Theo is holding his cards close to his chest and saying, 'well, Iíve got one year left on my contract, I want £100,000 a week', I donít know."