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* C$ hits session low of C$0.9964 vs US$, or $1.0036 * Blocked Petronas-Progress deal hurts sentiment * Bank of Canada eyed for rate tone change By Claire Sibonney TORONTO, Oct 22 (Reuters) - The Canadian dollar skidded to a more than 10-week low against the U.S. currency on Monday, hurt by a blocked energy sector takeover and expectations that the central bank will drop its hawkish tone on interest rates on Tuesday. The federal government's shock decision to block Malaysian state oil firm Petronas' C$5.17 billion bid for Progress Energy dented demand for the currency, which gains from acquisition flows into the country. Progress and Petronas have responded that they will try to convince Canada to reverse its rejection of the takeover, and will ask what they must do to get the deal back on track. "There's still a 30-day appeal that can be done, but the initial reaction was negative and adds to the recent pressure on the Canadian dollar," said Matt Perrier, director of foreign exchange sales at BMO Capital Markets. Analysts said Canada's dollar will feel longer-term pain from the government's rejection of the deal, as a drop in merger and acquisition activity hints that mining and energy companies are off limits to some buyers. "It's not just the actual impact of the dollars, it's the whole psychology behind the sentiment, if people believe the story then it has a bigger impact," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto, who nevertheless is projecting the Canadian dollar to appreciate by year-end. At 3:08 p.m. (1808 GMT) the Canadian dollar was trading at C$0.9950 to the greenback, or $1.0050, compared with C$0.9932, or $1.0068, at Friday's North American close. Earlier, the Canadian dollar weakened as far as C$0.9964, or $1.0036, its softest level since Aug. 10. BMO's Perrier said the next major level of support for the Canadian dollar is around parity, which also marks the 100- and 200-day moving averages. The blocked deal could also signal tough times ahead for Chinese oil group CNOOC's C$15.1 billion offer for oil producer Nexen. "Clearly, having one knockback heightens expectations of a second," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London, adding that of more immediate interest is a Bank of Canada rate decision due on Tuesday. While investors are not expecting a change in the key policy rate any time soon, they will be closely watching to see if the central bank drops language about an eventual rate hike, after the bank's governor failed to mention it in a speech last week. A Reuters poll released on Thursday suggested the central bank will postpone interest rate hikes until the fourth quarter of next year and will likely water down, rather than eliminate, its hawkish language. Since Governor Mark Carney's speech last Monday, the Canadian dollar has fallen nearly 2 percent. Canadian bond prices were flat to lower across the curve, outperforming U.S. Treasuries, except at the very long end. The two-year bond was up half a Canadian cent to yield 1.085 percent, while the benchmark 10-year bond fell 23 Canadian cents to yield 1.870 percent. The 30-year bond was down 40 Canadian cents, yielding 2.447 percent.