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* Central bank's IBC-Br index up 0.75 percent from May
* Strong month suggests government stimulus kicking in
* Central bank chief sees prices under control
* Finance minister urges faster credit growth
By Silvio Cascione
SAO PAULO, Aug 17 (Reuters) - Brazil's economic activity climbed in June at its fastest pace since March 2011, suggesting that the world's sixth-largest economy has bottomed out after a yearlong flurry of government stimulus.
While a rebound had been expected by authorities and market analysts, Brazil's anemic growth had been missing forecasts for months. Not only did various stimulus measures take many months to take effect, manufacturers cut back investments to cope with lower foreign demand and high costs at home.
Now, some economists say the central bank may decide it doesn't need to cut interest rates much deeper than the current lows, ev en though its president, A lexandre Tombini, s ees prices under control in coming quarters.
The Brazilian central bank's IBC-Br economic activity index rose 0.75 percent in June from May in seasonally adjusted terms, only slightly above the median forecast in a Reuters survey, the bank said on Friday.
The index, a gauge of activity in the farming, manufacturing and services sectors, rose 0.99 percent from the same period a year before, the bank added.
The IBC-Br is closely watched by economists who regard it as a proxy for official gross domestic product data.
"From now on, numbers will be better. We're finally seeing an economic recovery," said Flavio Serrano, an economist with Espirito Santo Investment Bank.
Surprisingly strong retail sales boosted Brazil's economic activity in June. After tax breaks went into effect, consumers sped up purchases of cars, home appliances and furniture.
Intent on jump-starting growth, President Dilma Rousseff went further, acting to curb currency gains, pledging to increase government purchases of local goods and this week launching a $67 billion package of road and railway concessions.
Finance Minister Guido Mantega praised the results, saying that Brazil's recovery "is becoming clearer. " Still, he said credit growth remains "insufficient," urging state-owned Banco do Brasil to aim for bolder lending targets to put pressure on private-sector rivals.
Reinforcing the thrust of the government's actions, the central bank has slashed its benchmark interest rate eight times over the past year to a record low of 8 percent from 12.5 percent in mid-2011. Yields on rate futures still priced a high probability of two more cuts this year to 7.25 percent, but some analysts said that may change soon.
"The market will likely adapt its view to definitely forecast the Selic rate at 7.5 percent by the year-end," said Darwin Dib, chief economist at CM Capital Markets, in a note.
Inflation has not been a problem for the central bank this year as it moved toward the mid-point of the official target of 4.5 percent after reaching a seven-year high of 6.5 percent in 2011.
While th e relief in inflation "i s not linear , " prices should remain under control in coming quarters, c entral bank chief To mbini reiterated on Friday.
But some economists warn that could change in a country where growth has historically been accompanied by rapid price increases.
The remaining gap between strong consumer demand and feeble industrial output, analysts say, may stoke inflation as the economy gears up in coming months. Brazil's lagging industrial sector eked out modest growth in June after three straight months of decline, but remained weak.
Brazil will likely grow less than 2 percent this year, its worst annual performance since 2009, but will likely expand by 4 percent next year, according to the median market view in a central bank poll. For some economists, this will push inflation dangerously close to the ceiling of the government's target at 6.5 percent.
"Industry has clearly underperformed over the last several quarters. Industry is more exposed to external conditions, which are not great. By contrast, parts of the economy which are more sensitive to domestic demand have outperformed, under credit expansion, rising wages, and all-time-low unemployment rates," said BNP Paribas' economist Gustavo Arruda.
Despite June's improvement, Brazil's economic growth eased in the second quarter from the previous one, according to the seasonally adjusted IBC-Br index.
Economic activity expanded 0.38 percent between April and June compared w ith t he prior three months, down from a 0.63 percent gain in the first three months of the year.
The median estimate in a Reuters survey of 18 analysts was for a rise of 0.7 percent in the IBC-Br for June. Forecasts ranged from 0.3 percent to 0.9 percent gain.
Previous readings were revised up slightly to show a monthly fall of 0.01 percent in May and a gain of 0.12 percent in April. They had been previously reported as a decline of 0.02 percent in May and a rise of 0.10 in April.
Brazil's statistics agency IBGE will release its official second quarter GDP figures on Aug. 31.