UPDATE 1-Brazilian stimulus should bear fruit in H2 - Mantega

* Lower rates, industry measures to help manufacturers

* Consumer activity has room to grow, despite defaults

By Danielle Fonseca

SAO PAULO, July 4 (Reuters) - Brazil's stalled economy should gain steam in the second half of the year as government stimulus measures and lower interest rates begin to pay off, Finance Minister Guido Mantega said on Wednesday.

In comments to business leaders in Sao Paulo, Mantega said tax incentives for industry, cheaper borrowing costs, and targeted state purchasing of Brazilian products would combine to revive growth that has stagnated in recent quarters.

"The second semester has to be better than the first," he said.

After steady growth of more than 4 percent annually over the past decade, Brazil's economy stagnated late last year as the crisis in Europe and the global downturn lowered demand for commodity exports and hurt investment by Brazilian businesses.

President Dilma Rousseff has made reviving Brazil's lost boom the focus of her administration -- prodding the central bank to lower interest rates and announcing incentives for certain industries.

By targeting Brazilian manufacturers, crippled in recent years because of a stronger local currency and a flood of cheap imports, the measures "are building a more competitive country", Mantega said.

The measures, he said, have helped make the country's currency more competitive in global markets. The real, which traded near 1.70 to the dollar earlier in the year, in recent weeks has weakened to more than 2.00 per dollar.

Woes abroad have eased Brazil's perennial battle with inflation, giving policymakers further room to seek rate cuts and additional changes to monetary policy, Mantega said. Brazil's central bank last month cut the benchmark interest rate to 8.5 percent, a historic low.

In growth terms, the efforts have so far borne little fruit.

Manufacturers continue to limp along -- with data this week showing that industrial production in Brazil in May fell 0.9 percent compared with April, the third straight month of contraction.

Lower interest rates, Mantega said, will help stimulate Brazil's consumer market. Though economists have raised flags in recent weeks over soaring default rates for Brazilian lenders, Mantega said bad loans and the overall share of credit in the economy remain far lower than those of many other countries.

"It's nothing compared with international levels," he said.