* C$ pares losses to $$1.0163
* Some say Japan crisis may drive C$ back below parity
* Bond prices soar on safety bid
* Japan braces for potential radiation catastrophe (Adds details, updates prices)
By Ka Yan Ng
TORONTO, March 15 (Reuters) - The Canadian dollar fell hard against the U.S. dollar on Tuesday on fears of nuclear catastrophe in Japan, but then regained a fair bit of ground, helped by a rebound in equity markets on renewed confidence in the U.S. economy.
The currency dived more than 2-1/2 cents from Monday's close to its lowest level in more than four weeks. By session's end, however, it had regained more than a penny of that.
The early move was dramatic and volumes were strong, mirroring aversion to risk that also drove world stock markets sharply lower and pushed down the price of oil -- usually a leading factor in the Canadian dollar's direction. [MKTS/GLOB] [O/R] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on the link between the Canadian dollar and commodity prices, see: r.reuters.com/hyp58r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Equities pared losses after the U.S. Federal Reserve maintained its ultra-loose monetary policy and said the economy was gaining traction. [ID:nnN15230117]
That added to figures that showed manufacturing in New York state rose to a nine-month high in March and homebuilder sentiment ticked up to its highest level since May 2010. [ID:nN15228136]
"Financial markets are shifting their focus back to stronger growth prospects and recognizing the influence of Japan on a global economy is still fairly minor," said David Tulk, chief macro strategist at TD Securities.
The Canadian dollar dropped early in the day as the Japanese government raced to avert a radiation catastrophe and concern intensified about the impact of the disastrous events in the world's third-largest economy. [ID:nL3E7EF3II]
The Canadian dollar fell as low as C$0.9974 to the U.S. dollar, or $1.0026, its weakest point since Feb. 11, plunging out of the range between C$0.97 and C$0.98 that it had been locked in for most of the past two weeks.
It finished the day at C$0.9840 to the U.S. dollar, or $1.0163, still down more than a penny from Monday's close of C$0.9726 to the U.S. dollar, or $1.0282.
"Going forward I think this crisis too will pass, the market is trying to grapple for information and see the extent of the contagion and just how bad it's going to be," said Firas Askari, head of foreign exchange trading at BMO Capital Markets.
Some currency watchers said Japan's earthquake and unfolding radiation disaster will likely drive Canada's currency below parity with the U.S. dollar in the near term, for the first time since Feb. 1, as investors dump assets tied most closely to global economic growth. [ID:nN15236117]
But Tulk said this was unlikely.
"We certainly saw a run early this morning and that really was the peak point of capitulation in the market," he said. "As long as there's not more bad news on the nuclear front in Japan, I think it's hard-pressed to get the flight to quality into the U.S. dollar that comes at the expense of the Canadian dollar."
Bond prices were higher but gave up some ground by session's end in a still-uncertain trading environment, and as equity markets cut losses shortly after the U.S. central bank held rates steady.
The two-year Canadian government bond CA2YT=RR was up 9 Canadian cents to yield 1.630 percent, while the 10-year bond CA10YT=RR advanced 20 Canadian cents to yield 3.199 percent. Canadian bonds had a mixed performance against their U.S. counterparts.
Earlier, Canadian data that showed that productivity rose more last year than in any year since 2005 was overshadowed by the Japan news. [ID:nN15227998] (Additional reporting by Claire Sibonney; editing by Peter Galloway)