* GDP shrinks 3.6 percent in 4th quarter from 3rd
* Quarter-on-quarter contraction largest since 1996
* Economic growth slows to 5.1 percent in 2008
* Grim outlook increases calls for steep interest rate cut (Adds interest rate poll, quotes from economist, officials)
By Todd Benson
SAO PAULO, March 10 (Reuters) - Brazil's economy had its worst showing in more than a decade in the last quarter of 2008, shrinking a larger-than-expected 3.6 percent from the previous quarter as the global financial crisis took a heavy toll on Latin America's biggest country.
The result snapped a three-year run of nonstop growth for Brazil, which until recently appeared to be sidestepping the brunt of the crisis and was one of the few remaining engines of global growth as major economies in Europe, the United States and Asia sputtered.
The weak numbers, released on the same day that the International Monetary Fund warned that the world economy was headed for a "Great Recession," also bolstered the view that Brazil's central bank will need to aggressively cut interest rates to prevent a prolonged downturn.
On an annual basis, gross domestic product expanded just 1.3 percent in the fourth quarter from a year earlier, slowing sharply from a blistering growth rate of 6.8 percent in the third quarter, the government's statistics agency IBGE said.
More recent data has shown that Brazil's economy started 2009 on an even weaker footing, prompting some analysts to predict that the South American giant could end up this year with zero growth.
"The fact the economy slowed so sharply in the fourth quarter sets the stage for an even steeper slowdown in 2009," said Roberto Padovani, chief economist at WestLB do Brasil.
Industrial output posted its worst-ever yearly plunge in
January, sinking 17.2 percent, the IBGE said Friday. Consumer
confidence hit an all-time low in February, and companies like
aircraft manufacturer Embraer
On the flip side, the downturn has helped ease inflation as retailers slash prices to attract customers, potentially paving the way for a string of interest-rate cuts.
Interest-rate futures <0#DIJ:> at the BM&F Commodities and Futures Exchange in Sao Paulo fell sharply after the GDP numbers were released as investors priced in the chances of steeper rate cuts in the months ahead.
Most analysts were expecting Brazil's central bank to slash its benchmark lending rate by 100 basis points on Wednesday. But the consensus changed after the release of the GDP data, which showed the largest quarterly contraction since 1996.
Of 20 economists surveyed by Reuters on Tuesday, 16 predicted the bank will now cut rates by 150 basis points. [ID:nSAQ000262]
"The chances of a more aggressive rate cut increased significantly," said Jankiel Santos, chief economist at BES Investimento in Sao Paulo.
2009 A QUESTION MARK
For the whole of 2008, Brazil's economy grew 5.1 percent after expanding 5.7 percent in 2007. That was in line with market expectations of 5.2 percent annual growth, according to the median estimate of 20 economists surveyed by Reuters.
Until recently, the government's growth target for this year was a lofty 4 percent, an objective that Finance Minister Guido Mantega said on Tuesday was no longer feasible.
Mantega stressed, however, that the economy was already showing signs of recovery and that Brazil would not slip into recession this year. [ID:nSAQ000263]
"Brazil is one of just a few countries that are going to have positive growth this year," he said at a news conference in Brasilia, without providing a growth forecast.
President Luiz Inacio Lula da Silva, a former union leader who has presided over Brazil's biggest economic boom in three decades, called the fourth-quarter numbers a "red flag."
But he also voiced confidence that the measures the government has taken to stimulate lending and consumption would bear fruit in the coming months, giving the economy a boost.
The manufacturing sector dragged the economy down in the fourth quarter, with industries like steel producers and automakers all scaling back production as demand dried up. Industrial output slumped 7.4 percent from the third quarter, its biggest drop since the fourth quarter of 1996.
Capital spending plummeted 9.8 percent in the fourth quarter after surging 6.7 percent in the previous quarter, signaling that companies are wary of investing to increase capacity in the face of so much economic uncertainty.
The agricultural sector, a linchpin of the Brazilian economy, contracted 0.5 percent in the fourth quarter from the third, when it grew 1.5 percent.
Household consumption, which had been driving Brazil's economic boom in recent years, shrank 2 percent on a quarter-on-quarter basis.
The services sector contracted 0.4 percent from the third quarter, when it expanded 1.4 percent.
(For details on the IBGE's GDP report, please see: http://www.ibge.com.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=1330&id_pagina=1) (Additional reporting by Vanessa Stelzer, Daniela Machado and Raymond Colitt, Editing by Jonathan Oatis)