(Adds background, year-on-year drop)
BRASILIA, Dec 18 (Reuters) - Brazil's economic activity declined for an eight straight month in October despite a surprise increase in retail sales, confirming the fourth quarter started with no end in sight for the country's worst recession in a generation.
The central bank's IBC-Br economic activity index fell a seasonally adjusted 0.63 percent in October from September, when it dropped 0.47 percent. A Reuters survey of 18 analysts had forecast a 0.50 percent drop in the index, which measures activity in agriculture, industry and services.
Activity plunged 6.38 percent in October compared with October 2014, without seasonal adjustments. Brazil's economy is expected to shrink nearly 4 percent this year, with more than a million jobs lost and double-digit inflation.
Retail sales rose unexpectedly in October after falling for eight straight months, helped by a recovery for supermarkets and apparel. Tumbling industrial production offset the retail improvement, though. [nL1N1450JT
The IBC-Br index is an early indicator of gross domestic product data. The IBGE, the national statistics institution, is scheduled to release fourth-quarter GDP data in early March. (Reporting by Silvio Cascione; Editing by Larry King)