*Canadian dollar falls 0.5 percent against the greenback
*A 9 percent slide in oil prices encouraged decline
*Political instability in Ottawa also undermines currency
*Data showing stronger-than-expected GDP has little impact
*Bonds rally on safe-haven bid as stocks tumble
By John McCrank
TORONTO, Dec 1 (Reuters) - Canada's dollar fell against the U.S. dollar on Monday as a drop in oil prices combined with political uncertainty and a bleak economic outlook to outweigh a report showing Canada's economy registered its strongest growth in a year in the third quarter.
Canadian bond prices rallied as investors parked their cash in safe-haven government debt in response to a steep drop in the equity markets.
The Canadian dollar ended the North American session down 0.5 percent against the U.S. dollar, at C$1.2451, or 80.31 U.S. cents. That's down from C$1.2370 to the U.S. dollar, or 80.70 U.S. cents, at Friday's close.
It was the currency's weakest close versus the greenback in 10 days and may signal more weakness to come.
"If we look at the sharp selloff in the commodity markets ... and the very sharp selloff in equity markets ... one would expect the currency to be under even more severe pressure," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
The price of U.S. crude oil CLc1 slid 9 percent to C$49 dollars a barrel after OPEC put off a decision on new supply cuts until later in the month. Oil hit a record high of over $147 in July, but the slowing global economy has hurt demand.
Canada is a major oil producer and its currency is often influenced by moves in its price.
Political uncertainty in Canada has also taken a toll on the currency, analysts said.
Canada's three opposition parties have agreed to form a coalition in an attempt to take power from the minority Conservative government. The opposition said the government must go because it has failed to take significant action on the economic crisis. [See ID:nN01497021]
That political uncertainty helped overshadow a report showing Canada's gross domestic product bucked the negative trend of most other countries in the world in the third quarter. Canada's economy grew 1.3 percent on an annualized basis in the quarter, beating the market forecast of 1.1 percent growth.
While the headline number was solid, the details of the report showed that domestic spending is slowing, and nearly all analysts believe Canada's economy will weaken moving forward.
Canadian bonds rallied in response to plunging North American stock markets, which increased the allure of safe-haven government debt, said Eric Lascelles, chief economics and rates strategist at TD Securities.
The Toronto Stock Exchange's main index ended Monday's session down 9.3 percent, or 864.41 points, largely in response to the drop in the price of oil. The TSX is heavily weighted toward commodity stocks.
The two-year bond rose 20 Canadian cents to C$102.26 to yield 1.594 percent. The 10-year bond gained C$1.35 to C$108.85 to yield 3.163 percent.
The yield spread between the two-year and 10-year bond was 171 basis points, down from 179 at the previous close.
The 30-year bond climbed C$2.80 to C$121.55 to yield 3.761 percent. In the United States, the 30-year Treasury yielded 3.239 percent. (Editing by Frank McGurty)