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* Canadian dollar tumbles 1.4 pct, 6.8 pct for the week
* Bond prices mixed on talk of new U.S. bailout measures
* Inflation begins to ease in Sept, but reaction muted
By John McCrank
TORONTO, Oct 24 (Reuters) - The Canadian dollar's free-fall against the U.S. dollar extended into a sixth-straight session on Friday, as a feeling of inevitability about a global recession undercut support for the commodity-linked currency, pushing it briefly to its weakest since September 2004.
Domestic bond prices ended mixed, unwinding the majority of an early safe-haven rally as talk of plans by the U.S. Treasury to backstop insurers was met with cheers by investors.
The Canadian dollar ended the North American session down 1.4 percent against the U.S. dollar at C$1.2729, or 78.56 U.S. cents. That compares with C$1.2557 to the U.S. dollar, or 79.64 U.S. cents, at Thursday's close.
During the session, the currency fell as low as C$1.2848 to the U.S. dollar, or 77.83 U.S. cents. It was down 6.8 percent since last Friday, marking its fourth-straight losing week.
"Equity markets are still under pressure, commodity markets are still under pressure, the (U.S.) dollar is still extremely strong across the board and... that's been leaning on the Canadian dollar."
In the overseas session, data showed the British economy contracted for the first time in 16 years in the third quarter, fanning fears of a global recession. Such fears are contributing to a global selloff in equities and reinvestment in safer assets such as U.S. Treasuries and other dollar-denominated securities, fueling demand for the greenback.
Back in Canada, Finance Minister Jim Flaherty said Canadians are in for "rough times" and that he was unable to rule out a federal budget deficit next year because of the global economic uncertainty.
The nearly nonstop flow of negative news has hammered stock markets globally. The Toronto Stock Exchange fell 6.8 percent at Thursday's open, before staging a rebound to close down just 0.4 percent.
That volatility sent foreign exchange investors away from the Canadian dollar, as the level of demand for the natural resources Canada exports was thrown into doubt.
"If we are going to see any type of prolonged stability in the Canadian dollar, that is sustainable, then I think we are going to have to see equity markets bottom out, and commodity markets bottom out," said Davis. "Until that happens, I don't think people will have a lot of confidence aggressively buying the Canadian dollar."
The currency has tumbled more than 20 percent so far this year against the greenback.
Bond rallied strongly at the open, as the woes in stock market made relatively stable government debt more attractive to investors, but later unwound much of the gains on chatter about possible new U.S. bailout measures.
"There is increasing talk about the (U.S.) Treasury bailing out insurers on top of banks and other actions of that sort, so I guess the pendulum is swinging back to additional government intervention," Eric Lascelles, chief economics and rates strategist at TD Securities.
On the data front, Canada's annual inflation rate began to descend from a five-year high in September, as prices fell for cars, clothing and computers. See [ID:nN24500487]
The data was mostly on par with market expectations.
Another report showed that Ottawa ran a C$1.75 billion deficit in August but still had a C$1.16 billion surplus for the April to August period.
The two-year bond rose 4 Canadian cents to C$101.31 to yield 2.107 percent. The 10-year bond fell 5 Canadian cents to C$104.88 to yield 3.642 percent.
The yield spread between the two-year and the 10-year bond moved to 160 basis points from 159 at the previous close.
The 30-year bond dropped 35 Canadian cents to C$114.40 to yield 4.136 percent. In the United States, the 30-year treasury yielded 4.070 percent. (Reporting by John McCrank)