The 2 percent drop in September from August -- more than the 1.3 percent fall expected in a Reuters survey -- came parly as automobile production dropped after a build-up in inventory, government statistics agency IBGE said on Tuesday.
But the slowdown was broader than vehicle output, as 16 of the 27 industrial sectors surveyed contracted in the month.
Manufacturers have struggled with weak sales, rising payroll costs and an unusual inability by managers to lower factory usage -- reflecting on dismal profit growth in the third quarter.
"This could reflect the global uncertainty now. Industry suffers with the world slowdown," said Mauricio Rosal, Brazil economist with Raymond James in Sao Paulo.
"This puts a clear bias toward a longer and more aggressive cycle of interest rate cuts," he added.
Industry has struggled in Brazil this year on a number of reasons, from a strong currency that has stoked imports to capacity strained enough to generate inflationary pressures.
Output fell 0.1 percent in August from July, revised from a previously-reported 0.2 percent drop.
In addition, a global economic slowdown, weighed down by an ongoing euro zone sovereign debt crisis and fragile US recovery, have recently cut into forecasts for Brazil's own expansion this year. Analysts now see that figure at about 3.29 percent, down from 4 percent at the start of the year.
The central bank has cut a full point off its benchmark interest rate so far this year, taking the Selic rate to 11.5 percent on global worries despite above-target inflation.
Rosal said he would now likely revise down his interest rate forecast at the end of the easing cycle to around 9.5 percent from a current view of 10.5 percent.
Yields on interest rate futures contracts sank in early trading as investors increased their bets for interest rate cuts to come. The yield on the contract due January 2013 fell to as low as 10.21 percent from 10.29 percent in the previous session.
Brazil has the highest interest rates among major world economies, and President Dilma Rousseff has emphasized her desire to see those rates come more into line with global peers such as India and China.
A 5.5 percent plunge in capital goods output in September could also presage a rough fourth quarter, Rosal noted.
"That shows, among other things, that the outlook for investment in this next quarter is going to be plenty weak, as well," Rosal said.
Output also fell in September compared to a year earlier, dropping 1.6 percent, more than the 1 percent median drop in a Reuters survey. In August 2011, industrial output was 1.8 percent higher than a year ealier.
Copyright Reuters, 2011