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* Economy grows 0.3 pct in August vs forecast of 0.2 pct
* Oil and gas extraction expands 2.8 pct
* Non-farm payroll employment rises by 51,300 in August
* Canadian dollar firms after data
By Louise Egan
OTTAWA, Oct 31 (Reuters) - Canada's thriving oil and gas industry helped the economy grow by 0.3 percent in August from July, confirming modest growth that is expected to keep the Bank of Canada's key interest rate on hold for more than a year.
The monthly gross domestic product data, released by Statistics Canada on Thursday, showed the economy continues to bounce back from a downturn in June caused by severe flooding in the nation's oil capital Calgary and a strike by construction workers in Quebec.
The economy contracted 0.5 percent in June and then unexpectedly surged by 0.6 percent in July.
The gain in August was a notch stronger than expected. Analysts in a Reuters poll had forecast, on average, a 0.2 percent expansion.
Despite evidence the economy is regaining some lost momentum, Mazen Issa, macro strategist at TD Securities in Toronto, said the outlook remains pretty tame.
"From a broader perspective I don't think it changes the narrative of a sluggish backdrop that has been holding in Canada through this year and is expected to persist in the balance of the year and into next year," he said.
"From a policy perspective, probably not too much impact for the Bank of Canada."
The Bank of Canada last week cut its forecast for third-quarter growth to 1.8 percent, annualized, from 3.8 percent but economists said the data suggests the final number will be closer to 2.5 percent.
The central bank also dropped a reference to future interest rate hikes due to weak inflation and growth, signaling it could just as easily cut interest rates as raise them.
Most analysts still see rate cuts as unlikely, but after the Bank of Canada announcement, they pushed back their expectation on the timing of the first rate hike by six months to the second quarter of 2015.
Paul Ferley, assistant chief economist at Royal Bank of Canada, believes the central bank's next move is largely dependent on U.S. fiscal policy.
"Any re-introduction of the tightening bias by the Bank of Canada will also likely await clearer signs of the 'fiscal headwinds' dissipating in the U.S. that otherwise pose a risk of weighing on confidence among Canadian firms," he said.
The Canadian dollar firmed to a session high after the GDP data was released. It later traded at C$1.0437 versus the greenback, or 95.81 U.S. cents, stronger than Wednesday's close of C$1.0484 , or 95.38 U.S. cents. The loonie hit a high of C$1.0435 shortly after the data was released.
The main contributor to growth in August was mining and oil and gas extraction, with accommodation and food industries, real estate services and agriculture and forestry also providing support. Manufacturing shrank and construction was flat.
Goods-producing industries grew 0.4 percent, led by a 2.8 percent jump in oil and gas extraction and a similar increase in support activities for that sector.
Services industries expanded by 0.3 percent on growth across almost all sectors. Wholesale trade and transportation and warehousing grew 0.4 percent, while real estate services and professional, scientific and technical services both gained 0.3 percent. Accommodation and food services increased 1.3 percent.
The economy grew 2 percent year-over-year in August.
In a separate release, Statscan said non-farm payroll employment increased by 51,300 in August, rising across all major industrial sectors. The payrolls data is not the most closely-watched employment indicator and lags the market-moving labor force survey by several weeks.
The earlier survey also revealed strong job growth in August, with 59,300 positions added, although the report for September showed a more modest 11,900 net new jobs.