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* Boost from Chinese stimulus package fades
* C$ had earlier topped 85 U.S. cents
* Bond prices dip in extended reaction to Friday data
By Frank Pingue
TORONTO, Nov 10 (Reuters) - The Canadian dollar fell versus the U.S. dollar on Monday as a swath of dismal corporate news dampened the enthusiasm sparked by a Chinese stimulus package that had earlier propped up the currency.
Canadian bond prices ended flat to lower across the curve after outperforming the U.S. Treasury market in the previous session even though Friday's Canadian jobs data came in ahead of market expectations.
The Canadian dollar closed at C$1.1965 to the U.S. dollar, or 83.58 U.S. cents, down from C$1.1880 to the U.S. dollar, or 84.18 U.S. cents, at Friday's close.
That's a big turnaround from earlier in the day when the Canadian currency had rallied to C$1.1658 to the U.S. dollar, or 85.77 U.S. cents.
Weighing on the Canadian currency was a string of gloomy U.S. corporate news, including a move by major electronic retailer Circuit City to enter bankruptcy weeks ahead of the holiday shopping season. Such news dampens market sentiment and tends to lure investors to buy U.S. dollars as it is considered less risky than the Canadian currency.
Also darkening what had been improving market sentiment was news that the cost of rescuing American International Group Inc jumped to $150 billion after a smaller bailout by Washington failed to stabilize the ailing insurance giant.
And Fannie Mae, the largest source of funding for U.S. homes, reported a record $29 billion loss and said it is losing money so fast it may have to tap the government for additional cash to avoid shutting down.
"We walked in this morning and the world was safe and then within about a half an hour we realized it wasn't so safe and as the stock futures started to erode unfortunately it was back to more doom and gloom," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"Things are starting to get a bit better but it looks like we are pretty far from really feeling comfortable because after that Chinese news this morning, under normal circumstances, it should have been a big day for equity markets and clearly today it wasn't."
North American stock markets rallied at the open but spent the rest of the session relinquishing gains. The Toronto Stock Exchange's main index closed 0.9 percent higher after earlier rising as much as 3.5 percent. The Dow Jones industrial average shed 0.8 percent.
Initial enthusiasm was credited to a Chinese stimulus plan worth nearly $600 billion that many felt would mark the start of a round of big spending or interest rate cuts to stave off a recession in many countries.
A healthier Chinese economy would likely result in greater demand for commodities, whose prices often influence Canada's currency since they are the country's key exports.
BOND TURN LOWER
Canadian bond prices ended mostly lower as dealers dumped more secure government debt after allowing the market to outperform its U.S. counterpart on Friday even though Canadian jobs figures for October topped estimates.
"U.S. bond prices raced higher and Canada just didn't participate in that partly because there was this need to normalize things after the Friday anomaly," said Eric Lascelles, chief economics and rates strategist at TD Securities.
Also weighing on bond prices was Monday's Canadian housing starts report, which showed starts fell by a milder than expected 3.1 percent in October.
The two-year bond dropped 4 Canadian cents to C$101.66 to yield 1.921 percent. The 10-year bond was flat at C$104.25 to yield 3.716 percent.
The yield spread between the two- and 10-year bond was 179 basis points, down from 181 basis points at the previous close.
The 30-year bond dropped 20 Canadian cents to C$112.50 to yield 4.240 percent. In the United States, the 30-year Treasury yielded 4.202 percent. (Editing by Peter Galloway)