(Adds definition of depression, Finance Ministry comments, updates market reaction)
By Silvio Cascione
BRASILIA, March 3 (Reuters) - Brazil's economy contracted sharply in 2015 as businesses slashed investment plans and laid off more than 1.5 million workers, official data showed on Thursday, setting the stage for what could be the country's deepest recession on record.
Gross domestic product (GDP) shrank 3.8 percent last year, capped by another steep contraction in the fourth quarter , according to Brazilian statistics agency IBGE. It was the worst performance of any G20 nation in 2015.
The annual contraction, which matched market expectations in a Reuters poll, was also Brazil's largest since 1990, when the country was struggling with hyperinflation and a debt default. The outlook for 2016 is nearly as bad, with a central bank survey forecasting a 3.45 percent contraction.
Back-to-back annual drops of that magnitude would amount to the longest and deepest downturn since Brazil began keeping records in 1901.
Brazil is "replicating the lost decade of the '80s in just two years," Goldman Sachs economist Alberto Ramos said in a research report. He added that the economy was close to an outright depression, as defined by the length of the current downturn - nearly two years - and the more than 7 percent GDP drop experienced during that time.
A paralyzing political crisis, rising inflation and interest rates and a sharp drop in prices of key commodity exports have formed a toxic cocktail for Latin America's largest economy. The disastrous burst of a major mining dam and the biggest oil strike in 20 years added further strain in 2015.
Brazil's government said the downturn had been expected and added that it was focused on boosting the economy this year. "The government has taken all the necessary measures for an economic recovery," the Finance Ministry said in a note.
However, a private survey on Thursday showed services activity in February fell at the steepest pace on record, suggesting the economy had yet to hit bottom.
"We will probably see a similar contraction this year. There are no growth engines yet. The only one could be exports. But Brazil's economy is relatively closed, so we don't see that taking us out of this hole," said Joao Pedro Ribeiro, Latin America economist with Nomura Securities.
Unemployment and loan delinquency rates are likely to rise further this year as the recession drags on, economists forecast, potentially feeding public discontent. Meanwhile, debt restructuring firms are expecting a record amount of business this year as companies seek protection from creditors and go through painful reorganizations.
Analysts say banks appear well-capitalized to weather the crisis but could tighten credit to stay safe, which could delay an economic recovery.
Stocks on the Sao Paulo exchange shrugged off the poor GDP data, posting sharp gains.
The country's currency, the real, rose on news that leftist President Dilma Rousseff could be implicated in the massive corruption scandal at state-run oil producer Petroleo Brasileiro SA, also known as Petrobras.
Brazil, once the world's seventh-biggest economy, has been underperforming since 2011, the year Rousseff took office. A sharp increase in government spending and subsidized credit underpinned the labor market until 2014, at the cost of fueling inflation and eroding government finances.
The recession took root just as Rousseff started to roll back the costly stimulus policies, hiking taxes and interest rates and slashing investments in oil production. Rousseff's popularity plummeted to record lows last year, fueling street protests and calls for her impeachment.
"Despite all the rhetoric from Rousseff last year about boosting private investment, it's abundantly clear that investors, both foreign and domestic, are staying away in their droves," said Michael Henderson, lead economist with consulting firm Verisk Maplecroft in England.
The downturn has been so severe that Brazil's economy will probably only regain its previous size by 2019, as it grapples with a much larger debt load, according to a Reuters poll.
The IBGE data showed that Brazil's GDP contracted 1.4 percent in the fourth quarter from the third, which was its fourth straight quarterly decline. It was down 5.9 percent from the fourth quarter of 2014.
Agriculture was the only bright spot, with a fourth-quarter growth rate of 2.9 percent versus the third quarter. In the same period, the industry and services sector fell 1.4 percent each.
Household consumption declined for a fourth straight quarter, with a drop of 1.3 percent, while investments plunged 4.9 percent. Government consumption fell 2.9 percent, the steepest quarterly decline since the end of 2008.
Additional reporting by Bruno Federowski in Sao Paulo; Editing by Daniel Flynn, W Simon and Paul Simao