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* C$ at C$0.9942 vs US$, or $1.0058 * Blocked Petronas-Progress deal hurts sentiment * Bank of Canada eyed for rate tone change By Alastair Sharp TORONTO, Oct 22 (Reuters) - The Canadian dollar hit a two-month low against the U.S. currency on Monday, hurt by a blocked energy sector takeover and as some traders bet that the central bank will drop its hawkish tone on interest rates on Tuesday. The federal government's shock decision to block Malaysian state oil firm Petronas' C$5.17 billion bid for Progress Energy took some shine off the currency, which gains from acquisition flows into the country. "It's certainly not helpful or encouraging," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London. "It's indicative of the perception that Canada may not quite be as open for business as some might hope or anticipate." At 8:14 a.m. (1214 GMT) the Canadian dollar was trading at C$0.9942 to the greenback, or $1.0058, compared with C$0.9932, or $1.0068, at Friday's North American close. The Canadian currency also weakened against the euro, the British pound and the Swiss franc. The blocked deal could also signal tough times ahead for Chinese oil group CNOOC's C$15.1 billion offer for oil producer Nexen. "Clearly, having one knockback heightens expectations of a second," CIBC's Stretch said, adding that of more immediate interest is a Bank of Canada rate decision due on Tuesday. While investors aren't expecting a change in borrowing costs any time soon, they will be closely watching to see if the central bank drops language about an eventual rate hike, after the bank's governor failed to mention it in a speech last week. A Reuters poll released on Thursday suggested the central bank will postpone interest rate hikes until the fourth quarter of next year and will likely water down, rather than eliminate, its hawkish language. Since Governor Mark Carney's speech last Monday, the Canadian dollar has fallen 1.4 percent to its weakest since mid-August. The price of government bonds was lower across the curve. The two-year bond was off 3 Canadian cents to yield 1.100 percent, while the benchmark 10-year bond fell 38 Canadian cents to yield 1.886 percent.