* Canadian dollar supported by oil, risk aversion fades
* Bonds higher across the curve despite stock rally
* Focus on Tuesday's Bank of Canada interest rate decision
* Housing starts fall 18.8 pct in Nov, below expectations
TORONTO, Dec 8 (Reuters) - The Canadian dollar jumped versus the U.S. dollar on Monday, spurred by gains in the price of oil and as risk aversion and political turmoil in Ottawa faded.
Canadian bond prices headed higher on their safe haven appeal even as stock markets rallied.
At 10:30 a.m. (1530 GMT), the Canadian dollar was at C$1.2548 to the U.S. dollar, or 79.69 U.S. cents, up from C$1.2709 to the U.S. dollar, or 78.68 U.S. cents, at Friday's close.
Risk aversion, which has seen the U.S. dollar rise on safe haven interest recently, cooled as talk of an imminent bailout deal for the big three U.S. automakers and other government stimulus measures boosted global equity markets.
Over the weekend, U.S. President-elect Barack Obama unveiled an economic recovery plan that analysts said could cost at least $500 billion, include the creation of 2.5 million jobs by 2011, and launch of the largest U.S. infrastructure investment since the 1950s.
"We've seen the U.S. dollar take a step back," said Doug Porter, deputy chief economist at BMO Capital Markets.
"It's not just a Canadian dollar story."
Meanwhile, the price of oil rose more than 6 percent to above $43 a barrel. The Canadian dollar often tracks crude prices closely due to Canada's big oil exports.
Political uncertainty in Ottawa, which weighed on the currency for a little more than a week, has also faded. Prime Minister Stephen Harper won a suspension of Canadian Parliament last week, averting possible defeat of his minority Conservative government in a confidence vote.
"I think also besides the usual suspects, I think some calming in the Canadian political waters has probably removed some of the biggest risk in the Canadian dollar. We'll have to see how the Quebec election unfolds today," Porter said.
The Quebec election may have been an element of added risk to the Canadian dollar in recent sessions due to the turmoil in Ottawa, Porter said.
Canada's predominantly French-speaking province of Quebec holds an election on Monday and opinion polls show that separatists who want independence have little chance of winning power. [ID:nN08501546]
Bonds advanced as their safe-haven status remained intact as global economic weakness remained despite a big stock markets rally spurred by stimulus plans.
"Even with a rebound in stocks, and some firming in oil prices, the reality is that there is still tremendous demand for government fixed income products at this point," Porter said.
Canada got more proof of a deteriorating economy with the November data for housing starts. New home construction fell a bigger than expected 18.8 percent in November to the lowest annual rate in seven years. [ID:nN08501278]
The Bank of Canada rate decision due Tuesday is also in focus. The central bank is expected to slash its key overnight lending rate by at least 50 basis points to deal with the softening economy, a Reuters poll found. [ID:nN05295443]
The two-year bond rose 5 Canadian cents to C$102.33 to yield 1.548 percent. The 10-year bond gained 47 Canadian cents at C$109.87 to yield 3.043 percent.
The yield spread between the two-year and 10-year bond was at 156 basis points, up from 152 basis points at the previous close.
The 30-year bond surged 85 Canadian cents to C$122.15 to yield 3.730 percent. In the United States, the 30-year Treasury yielded 3.1211 percent. (Reporting by Ka Yan Ng; editing by Peter Galloway)