* IBC-BR index drops 0.33 pct from June
* Strong retail sales offset decline in manufacturing
By Silvio Cascione
SAO PAULO, Sept 13 Brazil's economic activity contracted less than expected in July as strong retail sales offset a sharp decline in manufacturing, bolstering hopes that the economy can avoid a quarterly drop.
The central bank's IBC-Br economic activity index declined a seasonally adjusted 0.33 percent in July from June, the bank said on Friday. Economists in a Reuters poll expected a decline of 0.9 percent.
Most analysts see Brazil's economy set to stumble in the second half of the year after short-term stimulus triggered an unexpected surge from April to June.
July's data suggests that decline will not be as sharp as expected previously, though.
"Today's results suggested that the economy can remain near stability in the third quarter, which is better than the decline we have been expecting. This poses upward risks to our forecast of 2.3 percent growth this year," wrote economists with research firm Rosenberg & Associados in a note.
The IBC-Br index is seen as a proxy for gross domestic product data.
Since President Dilma Rousseff took office in 2011, the country's tepid growth has eroded the confidence of investors bullish on Brazil's economy.
With the central bank raising interest rates to keep inflation within its target range, economists have slashed their growth estimates for this and next year and flagged the threat of a credit downgrade as public finances are strained.
The main surprise so far in July's economic data as a sharp increase in retail sales, the strongest since January 2012. Sales rose 1.9 percent in July as food prices posted a rare decline and a new tax break program boosted home appliance sales.
Strong consumption offset declining industrial output in July. Production shrank 2 percent from June as waning business confidence hurt demand for capital goods.
The IBC-BR index is a gauge of activity in the farming, industry and services sectors. Without seasonal adjustments, it rose a non-seasonally adjusted 3.38 percent in July over the same month a year ago.