* Economy loses 7,000 jobs in Feb; forecast was for gain of 15,000
* Jobless rate unchanged at 7.0 percent
* January trade deficit narrows to C$177 mln ($161 mln)
* Mixed signals on economy from both reports
By Louise Egan
OTTAWA, March 7 (Reuters) - The Canadian economy unexpectedly lost 7,000 jobs in February, giving little reason for the Bank of Canada to change its neutral stance on interest rates after strong hiring in January had raised hopes of renewed vigor in the labor market.
Statistics Canada's employment report, released on Friday, was mixed, showing a sizeable increase in full-time jobs which was offset by the disappearance of even more part-time positions. Private sector hiring was strong, but overshadowed by 50,700 job losses in the public sector, one of the biggest downturns in that sector since 2008. The services sector was hardest hit.
The unemployment rate held steady at 7.0 percent.
Analysts had forecast 15,000 new positions, after a gain of 29,400 in January and a loss of 44,000 jobs in December.
A separate report by Statscan on Friday showed the country's trade deficit narrowed more than expected in January to C$177 million ($161 million) from C$922 million in December.
But the report may disappoint the central bank, which wants to see an export revival, because the improvement was largely due to higher prices for commodities while export volumes fell.
The Canadian dollar weakened to a session low against the U.S. dollar shortly after the data but investors were also taking in a U.S. report showing an acceleration of jobs growth.
Economists cautioned against over reacting to the headline jobs number, pointing to the more upbeat details of the report.
"I think the bigger picture here is the North American economy is still chugging ahead and I wouldn't read too much into a negative print on the headline number in Canada," said Doug Porter, chief economist at BMO Capital Markets.
The job numbers are based on a household survey and are very volatile from month to month. Analysts prefer to look at the six-month trend, which shows the average monthly job gain was flat at 4,200 in the six months to February versus 15,300 in the six months to January.
Shaun Osborne, chief currency strategist at TD Securities, did not see the Bank of Canada reacting much to the report.
"I think for the Bank they probably want to see where we are in the middle of the year before they commit to any sort of stronger sense of direction on policy," he said. "They are not going to look at just one or two months of data and conclude that they need to ease, or do nothing, or do something else."
The Bank of Canada has kept its main interest rate unchanged at 1.0 percent for over three years and this week reiterated its guidance that the next move could be either a rate hike or a cut.
Canada's economy outperformed that of the United States in recovering quickly from the 2008-09 recession, but growth has been sluggish as exports and business investment have failed to bounce back as expected.
Stagnant employment in recent months has been accompanied by declining participation in the labor force, a trend also observed in the United States. The participation rate fell to 66.2 percent in February, a 12-year low according to one analyst.
The Canadian dollar was at C$1.1075 to the greenback, or 90.29 U.S. cents in late morning trade, weaker than Thursday's close of C$1.0992, or 90.98 U.S. cents.
Most of the employment setbacks were in the services sector. Employment in health care and social assistance fell by 27,500 in the month, and 24,600 workers in finance, insurance, real estate and leasing lost their jobs in the month.
The biggest employment creation took place in the "other services" category, which includes personal care services and civic and social organizations, which added 9,800 workers. The natural resources and agricultural industries hired 9,800 and 7,900 employees, respectively.
Wages for permanent employees rose 2.7 percent in the year to February, unchanged from January and well above the inflation rate.
The trade figures released on Friday were a pleasant surprise at first glance, with the trade gap narrowing much more than expected.
Exports edged up 0.2 percent for the month, but that was largely due to strong prices for crude oil, bitumen and natural gas. While overall prices for exports jumped 5.8 percent, volumes fell 5.3 percent.
Imports declined 1.6 percent, pulled lower by weak auto and energy product shipments.
"Notwithstanding the improvement in the overall trade balance, the details of the report were relatively soft, pointing to weakness in both foreign sales and domestic demand," said Adrienne Warren, an economist at Scotiabank.
Trade volumes could be hit by severe weather in North America in January, so economists are waiting for more data before drawing conclusions.
The country's trade surplus with the United States, by far its top trading partner, widened to C$3.62 billion in January from C$3.17 billion in December.