* C$ ends lower at C$0.9884 to the U.S. dollar, or $1.0117
* Touches lowest level since Aug. 11, pares losses
* Bond prices surge for third session on flight to safety
* Focus shifts to CPI, Canadian policy makers
* TD, CIBC downgrade Canadian dollar forecasts (Updates to close)
By Ka Yan Ng
TORONTO, Aug 18 (Reuters) - Canada's dollar fell hard against the U.S. currency on Thursday, weakening on worries over the European debt crisis and a raft of gloomy U.S. data that added to an already souring outlook for the world economy.
The nervousness, however, sent government of Canada bond prices surging for a third straight session in safe-haven gains as investors exited riskier stock markets.
The glum global outlook is one of the key points a parliamentary committee will examine on Friday when Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney will be grilled on the possible fallout for the domestic economy. [ID:nN1E77F1AL]
They will also be speaking ahead of key inflation figures from Canada, which are expected to show the all-items and core inflation annual rates moving closer to the Bank of Canada's target of 2 percent. [ID:nN1E77B0FV] ECONCA
But fluctuations in inflation have taken a back seat to concerns over global financial and economic turmoil.
The prospect of slowing growth has boosted the market's betting that interest rate cuts are in the cards, although economists believe it is too soon to consider such action.
"It's definitely not the signal (Carney) wants to convey," said Jimmy Jean, economic strategist at Desjardins Capital Markets.
"The market is expecting rate cuts at this point. I don't think he will do anything to open the door at this time. If things continue to worsen, we might see that probably more of a year-end, early-2012 story, but not in the next couple of months."
Instead of an interest rate cut, Jean expects the next Bank of Canada rate hike will not come until mid-2013, saying the Federal Reserve's pledge to hold U.S. rates near zero will take Canada's own rate path "hostage".
The new view joins an growing chorus of forecasters who say the Bank of Canada will keep rates steady at low levels for longer. [ID:nN1E77H0QC] BOCWATCH
The Canadian dollar CAD=D4 ended at C$0.9884 to the U.S. dollar, or $1.0117, down nine-tenths of a cent from C$0.9797 to the U.S. dollar, or $1.0207, at Wednesday's North American close.
The currency touched its lowest level since Aug. 11, hitting C$0.9939 to the U.S. dollar, or $1.0061, with the latest downdraft coming on the heels of data that showed U.S. factory activity in the U.S. Mid-Atlantic region sagged in August.
That added to soft U.S. economic news that showed jobless claims rose in the latest week and July consumer prices rose faster than expected. [ID:nN1E77H0E8]
Sentiment was already weighed down by the European debt crisis and persistent unease about the sluggish global recovery, which was a chief factor that sent European and North American shares sharply lower. [MKTS/GLOB] [.TO]
"Numbers showing greater-than-expected weakness reinforce concerns about the sustainability of the recovery," said Paul Ferley, deputy chief economist at Royal Bank of Canada.
The price of crude oil dropped steeply on the day, down more than 6 percent, which also weighed on the commodity-linked currency. [O/R]
Both TD Securities and CIBC World Markets predict a softer Canadian dollar as its typical drivers are expected to be less supportive in the current environment.
TD forecast the Canadian dollar to fall below parity with the greenback to C$1.04 to reflect the more downbeat mood, while CIBC forecast a C$0.95-C$1.02 trading range through 2012.
The two-year bond CA2YT=RR jumped 21 Canadian cents to yield 0.876 percent, while the 10-year bond CA10YT=RR advanced 73 Canadian cents to yield 2.310 percent.
Canadian government bonds outperformed their U.S. counterparts in the short-end of the curve, but lagged in longer-dated issues. (Reporting by Ka Yan Ng; editing by Rob Wilson)