By Peter Henderson

SAN FRANCISCO (Reuters) - Sun Microsystems Inc. SUNW.O unveiled on Wednesday its biggest software upgrade in years, a beefed up version of its flagship Solaris operating system that aims to simplify the software choking networks.

The roughly 300 new features of Solaris version 9 would help networks run with less intervention from administrators, a key to computer maker Sun's plans, and a potential cost savings for customers. For most buyers, it would provide a handful of "killer" improvements, said IDC analyst Al Gillen.

Sun says its strategy to add features normally considered separate programs, such as a security "firewall" and an application server, which is "middleware" software that feeds facts from databases to programs often used on a desktop computer, redefine the operating system.

Sun -- and rivals -- want the server eventually to run itself, becoming an invisible component of a network, so that the network becomes a single virtual computer to programmers, and the new version 9 of Solaris was seen as a step toward that.

"This is a new class of product," Ed Zander, president and chief operating officer, told a news conference. Sun shares easily outpaced many rival technology stocks on the Nasdaq on Wednesday, rising 6.7 percent, 46 cents, to $7.34.

Sun soared to renown as companies built networks and the Internet using its powerful work stations, but has had a hard time recovering since the economy slowed and the Internet boom collapsed about a year ago.

UNIX, LINUX ARE BROTHERS

One element of Sun's early success was its single-minded devotion to Solaris, a Unix-type operating system.

But Sun has sown confusion among investors recently by promising to come out with a Linux low-end computer expected in July, and Sun's insistence that Linux be used on lower-end machines has irked some Linux fans.

Linux is a newer but so far less powerful Unix that has captured the hearts of programmers, since it is not owned by a single company and was developed collaboratively. And corporations are enamored of Linux's price: it is free.

Total Linux server revenue in the United States nearly doubled in the first quarter from a year earlier, to $236 million, about 6 percent of the server market, Gartner Inc. server analyst Shahin Naftchi said.

"Fundamentally Linux and Solaris are two brothers" that would compete with Microsoft Corp. Windows, Sun's operating systems chief, Anil Gadre, said in an interview, contesting the belief that Linux would take Solaris markets.

Sun was developing Linux for network "edge" services, like print and mail serving, while Solaris, much more powerful, handled bigger computing tasks, he said.

Competitors International Business Machines Corp IBM.N and Hewlett-Packard Co. HPQ.N have supported Linux for some time. IBM, which released a more modest update of its Unix operating system, AIX, on Wednesday also, claims it is far ahead of Sun in Linux and "middleware".

"They don't have the middleware and they are late on Linux," said Vice President Surjit Chana, head of marketing for the high-end Unix computers for IBM. He also said customers did not want middleware with the operating system, as Sun plans.

Sun argues customers can easily plug in rivals' products, like an applications server from BEA Systems Inc.BEAS.O , if they prefer.

Analysts said Sun could become a Linux powerhouse if it does not pigeon-hole Linux as a low-end product.

"Sun is the Unix company. There is no reason they can't become the Linux company if they want to," said technology researcher Bill Claybrook of Aberdeen Group.

Sun is making its own version of Linux, in contrast to rivals like IBM and Hewlett-Packard Co, giving it room to come out with a better product, he said.

But the tighter it embraces Linux, the less control it is likely to have of the profitable hardware it runs on, since Linux often runs on cheap chips compatible with those of rival Intel Corp.

D.H. Brown Associates analyst Tony Iams said Sun appeared to understand that high-end software at the heart of the network would provide much of its future growth. "This light bulb in the company seems to have gone on," he said.