UPDATE 4-Dell profits disappoint as tech spending weakens

(Adds details on financial outlook and business segments)

By Eric Auchard

SAN FRANCISCO, Aug 28 (Reuters) - Dell Inc (DELL.O) posted a surprisingly steep drop in quarterly earnings on Thursday and said companies around the world are cutting back on technology spending, sending its shares tumbling 10 percent and sparking fears of weakness in the whole tech sector.

The world's second-largest computer maker, which cautioned in May that U.S. companies had become more conservative with technology spending in the face of a weak economy, said slow demand had spread to Europe and Asia as well as U.S. state and local government and small business. A strengthening dollar could further hurt demand for products overseas, Dell warned.

"They're starting to talk about demand destruction in Western Europe and in Asia," said John Menzies, a portfolio manager with Pacific Growth Equities in San Francisco.

"Up until this point the large tech companies, like the IBMs of the world, have done pretty well in holding up their earnings because they've had strong and consistent international demand," Menzies said. "This shows international economies are slowing down and Dell cited that specifically."

The computer maker's profit fell 17 percent in the second quarter ended Aug. 1, to $616 million, or 31 cents per diluted share, from the restated net income of $746 million, or 33 cents per diluted share, in the year-ago second quarter.

"Each geography saw profit growth well below revenue growth," Goldman Sachs analyst David Bailey wrote in a note to clients, referring to results in the company's core U.S. commercial business and operations in Europe and Asia-Pacific.

"It is conservatism that has been relatively consistent for the last six months or so, but it is somewhat spreading," Chief Financial Officer Brian Gladden told reporters on a conference call.