The 32-year-old missed the start of Hull's season with a knee injury, but he impressed and scored on his second appearance in the Tigers' 2-1 EFL Cup win at Bristol City on Tuesday night.
And with England hardly blessed by a wealth of quality central defenders, Phelan raised the possibility of Dawson forcing his way back into the national set-up.
"Michael's played at the highest level and he still wants to play at the highest level," Phelan said.
"He's a good guy, he's been there and seen it and he knows what it takes to win football matches.
"He does inspire others around him.
"We've got a few new players in this group and they will realise that a Michael Dawson in your team is a plus."
Dawson was injured in a pre-season friendly at Mansfield in July and did not return until Saturday's Premier League game against Stoke.
Phelan admitted he had considered leaving the former Tottenham defender out at Ashton Gate.
But Dawson convinced Phelan that he was fine to play and Hull duly ended a run of four straight defeats.
"He played a game last week and it was a case of do we put him in another one because he'll end up playing three games in a week," Phelan said.
"It's important when you ask a player how he feels and if he is ready for games.
"When he says 'yes' you get them in there playing. He's come through terrific and that's good for us.
"Confidence is a big thing and we have been on the back of a few hidings. A couple of those have come with 10 men, but we have got to be resilient.
"It was important we came here and showed authority, that we are a Premier League team."
Bristol City boss Lee Johnson defended his decision to drop loan sensation Tammy Abraham to the bench.
Johnson made nine changes from the side which beat Blackburn last weekend to take the Robins into the Sky Bet Championship play-off places.
Abraham has scored 11 goals since joining from Chelsea at the start of the season and been hailed as the 'future' of the club by Blues boss Antonio Conte.
But the teenager was kept in reserve for an hour, before almost taking the tie into extra time in the final seconds.
"Abraham has struggled in the last couple of games since his illness," Johnson said.
"He needed a bit of a rest for the greater good.
"This is what we are trying to achieve as a club, it's part of a big picture to get to where Hull are.
"They were promoted out of the Championship into the Premier League, and the only way to do that is to get the players' minutes and test them at a high level."