UPDATE 1-Brazil economic activity grows 0.4 pct in July

* June's IBC-Br index revised down to 0.61 pct

* Strong retail sales, modest industry growth in July

* Economic activity grows 2.3 pct in July from year ago

By Silvio Cascione

SAO PAULO, Sept 14 (Reuters) - Brazil's economy kicked off the third quarter at a slightly stronger pace than expected, suggesting an incipient recovery is taking hold after a year-long campaign of government measures to stimulate growth, central bank data showed on Friday.

The central bank's IBC-Br economic activity index rose 0.42 percent in July from June in seasonally adjusted terms. The median estimate in a Reuters survey of 12 analysts was for a rise of 0.30 percent.

June's rise, however, was revised down to 0.61 percent from 0.75 previously.

The index, a gauge of activity in the farming, manufacturing and services sectors, rose 2.34 percent from the same period a year before, the bank added, accelerating sharply from a 0.99 percent gain in the previous month.

The IBC-Br is closely watched by economists who regard it as a proxy for official gross domestic product data. Brazil grew just 0.4 percent in the second quarter from the first , marking one year of feeble performance as high costs and weak global demand hit domestic manufacturers.

Latin America's largest economy is expected to rebound in coming quarters after the central bank chopped its benchmark interest rate to a record low of 7.5 percent and president Dilma Rousseff offered tax breaks and other incentives to the country's struggling industries.

The median forecast in a central bank poll of analysts is for 4 percent growth in 2013, after an expected 1.6 percent expansion this year.

Retail sales and industrial output rose for for the second straight month in July, data showed earlier this month, supported by tax breaks on automobiles and home appliances.

Forecasts for the monthly rise of the IBC-BR index ranged from 0.2 percent to 0.6 percent.