UPDATE 2-Brazil economy shows signs of life, investment recovers

* Brazil GDP grows 0.9 percent in 2012; 0.6 pct in Q4 vs Q3

* Sharp slowdown from recent boom has spurred heavy stimulus

* Investment recovers after four quarters of declines

SAO PAULO, March 1 (Reuters) - Brazil's economy improved slightly in the last three months of 2012 and investment also posted an unexpected rebound, suggesting President Dilma Rousseff's flurry of tax cuts and other stimulus measures may finally be bearing fruit.

The economy grew just 0.9 percent last year, the government's statistics institute said on Friday. That was a disappointing performance following a decade-long boom in Latin America's largest economy, but it was in line with most analysts' forecasts.

Yet gross domestic product expanded 0.6 percent from October to December compared to the previous quarter, led by a strong performance in services. Household consumption, which Rousseff has tried to stimulate with tax and interest rate cuts, rose 1.2 percent, its best performance since the last quarter of 2010, when the economy was still thriving.

In the most hopeful sign, investment rose 0.5 percent, snapping a string of four straight quarterly declines.

The slight overall improvement suggests that Brazil could still meet market expectations for growth of about 3.1 percent this year.

"The economy is in fact recovering, but at a very slow pace," said Luciano Rostagno, chief economist at Banco WestLB.

Rostagno maintains his projection for 3 percent growth, but said he would be watching carefully for the potential need to revise it downward. "The data isn't inspiring and you need to be cautiously optimistic," Rostagno said.

Rousseff has scrambled to resurrect the once-booming economy with record-low interest rates, billions of dollars in tax cuts, and a more competitive exchange rate for Brazilian industries and exporters.

However, with a mismatch between strong consumer demand and several supply bottlenecks, inflation has risen to 6.15 percent on an annual basis, near the 6.5 percent ceiling of the central bank's target range even as growth remains slow, raising prospects of interest rate hikes later this year.

Manufacturing remained stuck in its years-long malaise, falling 0.5 percent in the fourth quarter.

The IBGE revised down third-quarter growth to 0.4 percent compared to the second quarter from a previously reported 0.6 percent.

Brazil grew 1.4 percent in the fourth quarter when compared to the year-earlier period, IBGE said. That was below expectations for growth of 1.6 percent in the Reuters poll.