The country of 1.3 billion people has been a Communist dictatorship since the overthrow of Gen. Chiang Kai-shek and his nationalist government in 1949.
But the age of absolute Communist power and a steadfast centralized government is fading, Wen told delegates at the three-day World Economic Forum meeting of business leaders in the Chinese city of Dalian.
Reforming the party and the Communist Party Leadership were "urgent tasks," said Wen.
"To do this the party must not represent the government and change the phenomenon of absolute power and excessive concentration of power," he said. "Thus, the party's and the country's leadership system must be reformed."
China has limited democracy in the form of village councils with elected officials. This could be expanded, he said.
"If people can rule a village well, they can manage a county well, even rule a town well," he said during his opening speech to the Forum's Annual Meeting of the New Champions -- often called the "Summer Davos" after the Swiss ski resort of the same name where the Forum's annual winter economic meeting takes place.
The comments were made during Wen's opening speech, which focused heavily on the state of the Chinese economy and China's ability to do what it could to help stabilize a shaky world economy, especially in Europe and the United States.
Wen's democracy comments go unreported for the most part in China's media, which is mostly state run, a report by the BBC said.
Wen, the third most powerful Chinese leader, has made similar comments before but his latest statements go further, the BBC report said. It could be his attempt to ingrain his legacy as a reformer and nudge the next generation of leaders toward change.
However, he might have an uphill struggle as the Communist Party appears nervous over the so-called Arab Spring uprisings and toppling of dictatorial regimes in northern Africa.
The Communist government continues to round up and imprison people, such as artist Ai Weiwei, who call for more democracy.
The contemporary artist, sculptor and architecture collaborated with Swiss architects Herzog and de Meuron as the artistic consultant on the Beijing National Stadium for the 2008 Olympics.
He was released in June after three months in prison ostensibly charges of tax evasion, although he is a known dissident, calling for more open democracy within government.
Wen's comments have from time to time made it into China's media, even as long ago as 2006. Xinhua reported a visit he made to Beijing Normal University in which he said China should create a democratic atmosphere that can ensure people's rights to vote and make more decisions for themselves in their daily lives and in their work.
"We must enable everybody to fully grow up in an environment of equity, justice and freedom," he said.