SAO PAULO Industrial production in Brazil rose slightly less than expected in August, data from government statistics agency IBGE showed on Tuesday, as the sector struggles to gather speed amid high interest rates.

Output was up 0.4% in August from July, IBGE said, recovering part of the losses seen a month earlier but below forecasts as the median estimate in a Reuters poll projected an increase of 0.5%.

Industry has been stuttering in Brazil this year, alternating between gains and losses as restrictive monetary policy to tame high inflation hurts consumption and investment decisions, IBGE's research manager Andre Macedo said.

The August increase was driven by capital and consumer goods production, but a drop in intermediate goods output partially offset those gains, according to the statistics agency.

Industrial production in August, IBGE added, rose 0.5% from a year earlier, while market expectations stood at a 0.8% rise.

The smaller-than-expected increases suggest that the sector was a drag on economic growth in the third quarter, Capital Economics' Chief Emerging Markets Economist William Jackson said in a note to clients.

"Service sectors are faring better, but it still looks like GDP growth last quarter was weaker than in Q2," he said.

Industry was key for the surprisingly strong growth posted by Latin America's largest economy in the three months through June.

(Reporting by Gabriel Araujo and Camila Moreira; Editing by Steven Grattan and Andrea Ricci)