Dawes -- a gymnastics icon with 4 Olympic medals -- applauds the 24-year-old for stepping back when she needed to ... telling TMZ Sports Biles was doing "what was right for her mentally as well as for her physically."

"It didn’t matter about having to prove fans wrong or prove the federation wrong or whatever it is, and you know, listen to what those around her are telling her what she should do."

Of course, Biles withdrew from competition last week after dealing with a mental block and "twisties" ... which she explained is when your mind and body don't connect while performing.

Dawes continued ... "But yet, she at 24 was mature enough to know, hey this is not a healthy environment for me to participate in right now."

Biles did recover ... and won the bronze in the balance beam finals on Tuesday -- her 7th Olympic medal (which ties for the most by a female American gymnast).

"She gave herself the time that she needed," Dominique tells us, "and then was able to get back out there and shine and that’s exactly what she did."

Dawes says mental health issues have been more openly talked about in sports over the last few years ... and Biles is now carrying the torch.

"It started with Michael Phelps and Naomi Osaka and it will continue with Simone Biles."

"I know when she comes back to the States she’s going to be a strong advocate for mental health.

We also asked the gold medalist what advice she has for Biles now that the Olympics are over and done with.

"Just enjoy and bask in this moment, and really work on her healing."