* Canadian dollar pulls back with equity drop
* Commodity-linked currency makes weekly gain of 2.7 pct
* Bonds falter on extended profit-taking (Updates to close)
By Ka Yan Ng
TORONTO, March 20 (Reuters) - The Canadian dollar retreated from early gains on Friday as stock markets fell and commodity prices softened, ending a three-day rally spurred largely by the U.S. Federal Reserve's plan to buy up government bonds.
The currency finished at C$1.2395 to the U.S. dollar, or 80.68 U.S. cents, down from C$1.2377 to the U.S. dollar, or 80.80 U.S. cents, at Thursday's close.
Despite the pullback on Friday, the Canadian dollar scored solid gains for the week, up 2.7 percent, mostly stemming from the aftermath of the U.S. central bank's announcement that it plans to purchase some $1 trillion of government and mortgage-backed debt.
But Toronto's main stock index ended an eight-day string of higher closes on Friday. The Canadian dollar's moves have recently been closely linked to the commodity-rich index.
"It's ending the week on a softer tone given the return of risk aversion with equities selling off," said Sal Guatieri, senior economist at BMO Capital Markets.
Earlier, the currency was moderately firmer against the greenback after figures showed Canadian January retail sales rose almost twice as much as expected. [ID:nN19306411]
Despite the rare piece of positive economic news, the overall economic landscape still points to a weak reading for gross domestic product data for January, analysts said.
The retail statistics initially helped push the Canadian dollar towards its overnight high of C$1.2292 to the U.S. dollar, or 81.35 U.S. cents, but stopped short. It later hit a session low at C$1.2450 to the U.S. dollar, or 80.32 U.S. cents.
Most Canadian bond prices slipped on Friday, extending profit-taking after Wednesday's gigantic rally and following the lead of U.S. Treasuries.
Investors were mulling the impact of the Fed's Treasury purchase program because details were still vague, said Sheldon Dong, a fixed income analyst at TD Securities.
"I would say its just profit-taking after Wednesday's monstrous session," he said.
"Despite the Fed buying Treasuries next week, the overriding factor is still supply. Supply still overwhelms what the Federal Reserve is going to be buying."
Meanwhile, the Canadian economic data this week has been slightly ahead of expectations, which also put mild pressure on government bond prices.
The two-year bond edged down 3 Canadian cents at C$102.91 to yield 1.011 percent. The 10-year bond fell 31 Canadian cents to C$108.99 to yield 2.732 percent.
The 30-year bond fell 75 Canadian cents to C$124.75 to yield 3.596 percent. The U.S. 30-year bond yielded 3.664 percent.
Canadian bonds mostly outperformed U.S. Treasuries, though the 30-year bond underperformed. The Canadian 30-year yield was 6.8 basis points below the U.S. curve, compared with 7.7 basis points on Thursday. (Reporting by Ka Yan Ng; Editing by Jeffrey Hodgson)