(Recasts, adds background, market reaction)
RIO DE JANEIRO, Sept 11 (Reuters) - Retail sales in Brazil posted their biggest monthly decline in nearly six years in July, a surprisingly weak performance that suggests the economic recession might have worsened.
Retail sales volumes dropped a seasonally-adjusted 1.1 percent in July from June, government statistics agency IBGE said on Thursday.
The plunge, the sharpest since the onset of the global financial crisis in October 2008, was unexpected by all 26 economists polled by Reuters. The median expectation in the survey was for an increase of 0.5 percent.
Retail sales have not posted a monthly gain since January, in stark contrast with the robust growth that helped keep Brazil's economy afloat over the past few years. As one of its main engines began to sputter, Brazil's economy slipped into recession in the first half of the year, threatening President Dilma Rousseff's chances of winning re-election in October.
Yields on interest rate futures <0#2DIJ:> dropped as traders pared bets that the central bank will raise interest rates next year to tame inflation. As consumer demand weakens, inflationary pressures tend to subside.
The main item in IBGE's retail survey, accounting for food, beverage and supermarket sales, dropped 1.3 percent in July from the prior month. Sales of furniture and home appliances plunged 4.1 percent, while fuel sales edged up 0.8 percent.
A broader measure of retail sales including automobiles and building materials rose 0.8 percent in July.
Retail sales fell 0.9 percent from the year-earlier period , IBGE added. (Reporting by Rodrigo Viga Gaier and Felipe Pontes; Writing by Silvio Cascione; Editing by W Simon and Nick Zieminski)