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(Adds forecasts, sales details and policy context)
By Alberto Alerigi and Brad Haynes
SAO PAULO, July 7 (Reuters) - Carmakers in Brazil are forecasting the worst drop in production in 16 years after plunging June output highlighted a severe industry slump despite ongoing government stimulus.
Production of cars, trucks and buses is expected to fall 10.0 percent in 2014 as sales retreat 5.4 percent, national automakers association Anfavea said on Monday.
Brazil's auto output fell 23.3 percent in June from May and plunged 33.3 percent from a year earlier, Anfavea said. Production in the first half of the year was 16.8 percent lower than the first six months of 2013.
If output tumbles as much as carmakers now expect, it will be the steepest annual drop since a 23.2 percent plunge in 1998.
The industry's slump has defied ongoing stimulus efforts by President Dilma Rousseff, whose government last month extended an industrial tax break through the end of the year, putting further pressure on a tight federal budget.
Even with the government support, carmakers in Brazil have been cutting workers as assembly lines go idle, threatening to push up Brazil's record-low jobless rate as an October presidential election approaches. Auto industry payrolls shrank 3.1 percent in June from a year ago.
Layoffs are one of automakers' few ways to protect profits as new factories, weak demand and evaporating exports to Argentina batter profit margins in a market that for years had stood out amid meager global growth.
Brazil's auto market, the world's fourth biggest, is dominated by global carmakers such as Italy's Fiat SpA, Germany's Volkswagen AG and U.S.-based General Motors Co and Ford Motor Co.
But higher interest rates and shaky consumer confidence have hurt Brazilian demand, knocking domestic auto sales 10.2 percent lower in June from May, according to Anfavea.
Fiat remained Brazil's top seller of cars and light trucks in June, with about 51,210 new registrations. VW held second place over GM, selling some 45,800 passenger vehicles compared to about 43,400 cars and light trucks sold by its U.S. rival. Ford sold around 21,900 vehicles.
Automakers in Brazil produced some 215,900 cars and trucks last month, while sales totaled about 263,600 vehicles. (Editing by Chizu Nomiyama)