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(Adds background, year-on-year data)
By Silvio Cascione
BRASILIA, March 16 (Reuters) - Brazilian economic activity contracted slightly in January, a central bank index showed on Monday, underscoring expectations of a recession this year.
The Brazilian central bank's IBC-Br economic activity index dropped a seasonally adjusted 0.11 percent in January from December, the bank said on Monday, below market forecasts for a 0.01 percent increase.
Economic growth dropped 1.75 percent from January 2014, according to the index, a gauge of farming, industry and services activity seen as an advance indicator for gross domestic product data, which is released quarterly.
According to analysts' expectations, as gauged in weekly central bank surveys, the economy is seen sliding towards its worst recession in 25 years.
Investment has plunged, with business confidence undermined by a massive corruption probe at state-run oil firm Petroleo Brasileiro SA.
Government efforts to plug a growing budget deficit and lower inflation, such as tax and interest rate hikes, have also hindered economic growth, according to economists.
National statistics agency IBGE is set to release official fourth-quarter GDP results on March 27. (Reporting by Silvio Cascione; Editing by Chizu Nomiyama and W Simon)