The central bank's IBC-Br economic activity index , a closely watched proxy for gross domestic product data, rose 0.27 percent in the fourth quarter from the previous one, rebounding from a 0.21 percent decline in the third quarter.

"The Brazilian economy regained traction during the fourth quarter and is likely to speed up further in the coming months," said Flavio Serrano, senior economist at Espirito Santo Investment Bank, citing a "strong" labor market and lagging effects of monetary stimuli implemented since August.

Brazil's economy lost steam in the second half of 2011 after interest rate hikes and amid prospects of slower growth abroad.

To stimulate economic growth and stave off spillover effects from the euro zone debt crisis, the central bank began slashing its benchmark interest rate from 12.5 percent in August to 10.5 percent currently.

The government also reduced taxes on manufactured products such as ovens and refrigerators to stoke demand for appliances.

"The economy hit bottom in the third quarter and then recovered," said Newton Rosa, chief economist at SulAmerica Investmentos in Sao Paulo. "But that doesn't change our expectation of further rate cuts by the central bank."

The central bank foresees 3.5 percent growth in 2012, while market analysts expected a 3.3 percent expansion in the latest Reuters poll. Brazil's finance minister Guido Mantega said economic growth will speed to 5 percent in the second half of 2012.

Other Latin American neighbors such as Mexico and Argentina are expected to go the opposite way, slowing in 2012 on lower global demand.

Interest rate futures fell after the data, also impacted by global concerns about a delay in deciding on a crucial bailout for Greece.

Analysts expected economic activity to expand 0.50 percent in December, according to the median forecast of eight analysts polled by Reuters. The estimates ranged from growth of 0.40 percent to 0.70 percent.