SANTA CLARA, California (Reuters) - Dell Inc Chief Executive Michael Dell said the business climate was improving and repeated his expectation for a "powerful" hardware refresh cycle beginning next year.

While noting that there are still obstacles to the recovery, Dell sounded optimistic about the upcoming year as the tech sector makes its way out of a crushing recession that has severely impacted end-demand.

"It's getting a bit better incrementally ..., but I think there are still challenges out there," Dell told business executives on Tuesday at a forum in Santa Clara, in the heart of Silicon Valley. "The U.S. is doing a bit better than Europe; Europe's probably six to nine months behind the U.S."

Dell expects companies to begin upgrading aging equipment starting in early 2010 and said the server refresh cycle was already underway and stronger than expected, thanks to Intel's new Nehalem processor.

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Roughly 80 percent of Dell's business comes from sales to businesses, institutions, government and education customers. The downturn in spending by those commercial customers has hit the world's No. 2 PC maker harder than it has competitors with more balanced portfolios, such as Hewlett-Packard.

And nearly 60 percent of Dell's revenue comes from PCs. Dell's shipments fell 17 percent in the second quarter, according to industry tracker IDC. Its market share stood at 13.7 percent.

Dell trails HP in global PC rankings and is being pressured from below by fast-rising Acer Inc, which has made huge market share gains, in part due to netbook sales.

QUEST FOR MARGINS

Dell and other technology companies have been looking to move further into the IT services business, with its higher margins and recurring revenue streams, and diversify away from lower-margin hardware.

The company has agreed to buy services provider Perot Systems for $3.9 billion in what would be the company's largest acquisition ever. Dell said the move was part of its play to build a different kind of services business.

"Perot Systems is of a sufficient size that gives us a certain scale, but it's also not too big," he said.

Dell is now planning to launch a smartphone with Google's Android mobile software on carrier AT&T's network, a source familiar with that has said. But when asked about how he views the mobile space, Dell said he had made no announcements, but company was looking at it closely.

"I do think there is definitely a phenomenon going on with the Internet in your pocket, and there are new platforms that are emerging," he said. " ... I think you'll see us begin to show up gradually."

(Reporting by Gabriel Madway; Editing by Lisa Von Ahn)