UPDATE 2-Brazil's economy stalls, but tops forecasts in May

* IBC-BR index down 0.02 pct from April, above forecasts

* Brazil's economic activity up 1.1 pct from year ago

* Data released one day after 8th interest rate cut in a row

* Better-than-expected data may signal recovery ahead-analysts (Adds details, background)

By Silvio Cascione

SAO PAULO, July 12 (Reuters) - Brazil's economy stalled in May from the prior month but topped pessimistic market forecasts, official data showed on Thursday, signaling that the world's No. 6 economy could be on even footing to resume growth in coming months after massive government stimulus.

The IBC-Br economic activity index, a gauge of activity in farming, manufacturing and services, fell a seasonally adjusted 0.02 percent from April, the central bank said. The median estimate in a Reuters survey of seven analysts was for a contraction of 0.5 percent.

The number came a day after the central bank chopped interest rates for the eighth straight meeting to an all-time low of 8 percent, keeping on an aggressive campaign started in August 2011 to ease credit conditions.

That, combined with targeted tax breaks and credit incentives to industries and consumers, has yet to reignite Brazil's fading boom, analysts say.

But May's IBC-Br number provided a rare break in the drumbeat of negative macroeconomic news for economic indicators for the month, including a surprise contraction in retail sales and sinking industrial output.

"Coincident indicators for June are pointing to an improvement in June, which means that gross domestic product could grow around 0.5 percent in the second quarter," said Santander analysts in a research note.

Brazil's gross domestic product grew just 0.2 percent in the first quarter versus the last quarter of 2011, marking the third straight quarter of near-zero growth.

Brazil, Latin America's largest economy, is unlikely to grow more than 2.5 percent this year, according to central bank and independent analysts.

While that performance would be stronger than in doldrums-plagued Europe, that GDP growth outcome for 2012 would log Brazil's weakest annual performance in three years.

It is also a far cry from 2010's red-hot 7.5 percent expansion that helped put Brazil in the radar of global investors hungry to pour money into rapidly developing economies.

MORE STIMULUS SEEN AHEAD

Following the release of the IBC-Br data for May, yields on interest rate futures <0#2DIJ:> fell slightly on the BM&FBovespa exchange as traders kept their bets on forthcoming interest rate cuts. Futures markets were also reflecting the shaky economic outlook globally after the U.S. Federal Reserve hinted more stimulus is unlikely in the near future.

Most economists expect the bank to end its monetary easing cycle with another rate cut of half a percentage point in August, but acknowledge that more weak data could prolong the rate-cutting drive.

Several emerging-market giants have seen their economies slow in the second quarter as manufacturing activity eases, casting doubts on the strength of their domestic demand as the European debt crisis already hits appetite for their exports.

Even at a record-low of 8 percent Brazil continues to have the highest benchmark lending rate among the BRICS group, with the exception of India. The group also includes China, Russia and South Africa.

China surprised markets last week with an interest rate cut, its second in a matter of weeks, to bolster an economy that is seen growing at its weakest pace in 13 years this year.

DATA REVISIONS

Brazil's IBC-BR economic activity in April was revised down to a rise of 0.10 percent from a previously reported 0.22 percent gain, while March's figures were revised up to a 0.17 percent fall from a 0.61 percent slide, the central bank added.

Without considering seasonal factors, Brazil's economy rose 1.09 percent in May from the same period a year earlier.

For the first quarter, economic activity was revised to a 0.54 percent gain, versus the fourth quarter, from a previously reported 0.49 percent rise.

Forecasts for the monthly fall ranged from 0.2 percent to 0.9 percent, according to the Reuters survey. Those estimates were taken on Wednesday following a surprise plunge in retail sales in May.

For the central bank IBC-Br statement, please see: here (Additional reporting by Alonso Soto in Brasilia; Editing by W Simon)