* C$ retreats along with stocks on risk aversion
* Bonds mixed with safe-haven bid at long end (Recasts)
By Frank Pingue
TORONTO, Feb 10 (Reuters) - The Canadian dollar was dragged lower against the greenback late on Tuesday morning as risk appetite diminished after the U.S. government delivered a bank bailout plan that may not be enough to shore up the financial sector.
The Canadian currency bounced around in a wide range as the U.S. plan was released before settling at lower levels as less desire for risky assets saw stocks slide as traders flocked to the U.S. dollar, considered a safe haven play.
The U.S. government said it will cleanse up to $500 billion in spoiled assets from banks' books and support $1 trillion in new lending. [ID:nTRT000362] But the massive plan failed to reinvigorate North American equity markets.
"Equities are coming off and that's contributing to a risk aversion tone, which is ultimately going to filter into bids for dollar/Canada," said Jack Spitz, managing director of foreign exchange at National Bank of Canada.
"From an immediate perspective it's negative Canada, but it's really not a negative Canada scenario as much as it's a negative risk scenario."
Canada's dollar rallied as high as C$1.2182, or 82.09 U.S. cents, moments after the plan was unveiled, but then fell as low as C$1.2373, or 80.82 U.S. cents.
By 11:45 a.m. (1645 GMT), the currency was at C$1.2353 to the U.S. dollar, or 80.95 U.S. cents, down from C$1.2164 to the U.S. dollar, or 82.21 U.S. cents, at Monday's close.
At the same time, North American equity markets were stuck near session lows with the Toronto Stock Exchange's main index down 1.6 percent while the Dow Jones industrial average was off 3.6 percent.
Earlier, Bank of Canada Governor Mark Carney said during testimony before a parliamentary finance committee, that the central bank has considerable flexibility to deal with the economy, including room to cut interest rates.
The comments from Carney did little to alter expectations that the bank will cut its key interest rate below the current 50-year low of 1.00 percent on March 3.
"The markets are pricing in pretty much another 50 (basis) point cut in March and that will keep the Canadian dollar on the defensive in the interim period," said Derek Holt, an economist at Scotia Capital.
Canadian bond prices remained mixed with prices down at the short end of the curve, given the measures to help support lending at U.S. banks. Issues at the long end of the curve were kept higher on safe-haven bidding.
The interest-rate sensitive two-year bond was down 6 Canadian cents at C$102.72 to yield 1.217 percent, while the 10-year bond rose 50 Canadian cents to C$109.90 to yield 3.020 percent.
The 30-year bond rallied C$1.20 to C$121.85 to yield 3.741 percent.