(Adds revised data, market reaction)
By Silvio Cascione
BRASILIA, May 12 (Reuters) - Services activity in Brazil fell in March at the fastest pace in at least five years, reinforcing bets on a steeper interest rate cut this month as economic data casts more doubt on the pace of a long-awaited recovery.
Services activity fell 2.3 percent from February after seasonal adjustments, worse than the median forecast in a Reuters poll of a 1.6 percent decline, national statistics bureau IBGE said on Friday. It was the deepest drop in the historical series dating back to 2012, IBGE said.
IBGE also revised down data from previous months. Services grew 0.4 percent in February from January, instead of 0.7 percent as originally reported, and remained stable in January, down from a previously reported rise of 0.2 percent.
Services shrank 5.0 percent from March 2016, compared with expectations for a drop of 3.8 percent in a Reuters poll.
The worse-than-expected performance of services companies followed news this week of the deepest monthly drop in retail sales in 14 years and the lowest inflation rate in nearly 10 years - consequences of the country's worst recession on record, which started two years ago and has been widely forecast to end in the first quarter of 2017.
The renewed signs of economic weakness reinforced bets on a bolder interest rate cut by the central bank at its next meeting on May 31. Yields on rate futures implied a 41-percent chance of a 125-basis-point cut to 10.00 percent, up from a probability of 38 percent on Thursday and 15 percent on Monday, according to Thomson Reuters calculations.
Last month, the bank slashed its benchmark lending rate by 100 basis points to 11.25 percent. It was the fifth cut in a row and the deepest in nearly eight years.
Brazil's government has forecast a quarterly growth rate of about 0.8 percent for the first quarter. The government is sticking to that forecast as many indicators such as steel output, car sales and agricultural production point to a recovery, Finance Minister Henrique Meirelles said.
Economists expect Brazil's economy to grow 0.5 percent this year after contracting more than 3 percent in each of the past two years. The ranks of the unemployed have grown to a record 14 million Brazilians, or 13.7 percent of the labor force. (Reporting by Silvio Cascione; Editing by Bernard Orr)