EXCLUSIVE-UPDATE 2-Oracle won't divest Sun's hardware business

* Oracle CEO says won't sell off Sun's hardware business

* CEO says to boost investment in SPARC microchips

* Ellison says will keep disk storage, tape backup units (Adds more quotes from Ellison, background)

BOSTON, May 7 - Oracle Corp Chief Executive Larry Ellison said he won't sell off Sun Microsystems Inc's hardware business, dispelling speculation that he only wanted the company for its software units.

Ellison shook up Silicon Valley last month by sealing a more than $7 billion deal to buy Sun, the world's No. 4 maker of server computers and also the developer of Java and Solaris software. Oracle unexpectedly swooped in after Sun's talks with International Business Machines Corp broke apart.

"We are definitely not going to exit the hardware business," Ellison said in an email interview with Reuters. "If a company designs both hardware and software, it can build much better systems than if they only design the software. That's why Apple's iPhone is so much better than Microsoft phones."

His comments fly in the face of speculation by some analysts that Oracle, the world's largest database software maker, may have bought Sun for its software assets and that it will eventually divest the hardware business.

Ellison declined to respond to a question on what he would do if Oracle runs into trouble in its efforts to turn around Sun's ailing computer server business, which has lost market share to IBM as well as Hewlett-Packard Co.

But Ellison said he plans to boost investment in Sun's SPARC microprocessors, which serve as the brains in its line of high-end Unix computers. The biggest buyers of these servers are large corporations and government agencies.

"We think designing our own chips is very, very important. Even Apple is designing its own chips these days," he said.

Ellison said he believes that by jointly developing Oracle's existing arsenal of software with Sun's computers and its SPARC microprocessors, they can build machines designed for specific purposes that work better than ones pulled together from separate components.

Oracle has sought to do this in the past through partnerships with hardware makers, including HP.

"Once we own Sun, we'll be able to plan and synchronize new features from silicon to software, just like IBM and the other big system suppliers," Ellison said in the interview.

Oracle plans to work with Japan's Fujitsu Ltd, which helps Sun design its SPARC microprocessors, to add new features that will improve the performance of Oracle's database software when used on Sun's servers. That will make Sun hardware more competitive versus rival products from IBM than it is today, he added.

Ellison also said he intends to hold on to Sun's data storage business and its tape backup unit, which compete with EMC Corp and IBM.

"Sun was very successful for a very long time selling computer systems based on the SPARC chip and the Solaris operating system," he said. "Now, with the added power of integrated Oracle software, we think they can be again."

Sun rose to prominence in the 1990s but never fully recovered from the dot-com bubble burst in the early 2000s, when demand for its high-end servers cratered.

While the deal makes Oracle the world's fourth-largest maker of servers, it puts the software maker into the No. 2 slot in the high-end of the server market, which was worth about $17 billion last year.

IBM spokesman Ed Barbini declined to comment on Ellison's plans.