* C$ ends at C$0.9926 vs US$, or $1.0075 * Off day's low of C$0.9964 vs US$, or $1.0036 * Blocked Petronas-Progress deal hurts market sentiment * Bank of Canada eyed for rate tone change By Claire Sibonney TORONTO, Oct 22 (Reuters) - The Canadian dollar hit a more than 10-week low against the U.S. currency on Monday, hurt by a blocked foreign takeover in the energy sector and expectations the Bank of Canada will drop its hawkish tone on interest rates on Tuesday, but the currency recovered late in the day and closed slightly higher. The Canadian government's shock decision to block Malaysian state oil firm Petronas's C$5.17 billion bid for Progress Energy dented demand for the currency, which gains from acquisition flows into the country. Progress and Petronas said they will try to persuade the government to reverse its rejection, and ask it what they must do to get the deal back on track. "We certainly digested the news late Friday of the blocking of the Progress Energy deal...I think the market is now waiting for the Bank of Canada tomorrow morning," said Matt Perrier, director of foreign exchange sales at BMO Capital Markets. While investors are not expecting a change in the central bank's key policy rate any time soon, they will be watching closely to see if the bank drops language on Tuesday about the necessity an eventual rate hike after bank Governor Mark Carney failed to make mention of that stance in a speech last week. "There's still a 30-day appeal (of the Petronas decision) that can be done, but the initial reaction was negative and adds to the recent pressure on the Canadian dollar that originated a week ago on the back of Mark Carney's speech." 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 Carney's speech last Monday, the Canadian dollar has fallen more than 1 percent. The Canadian dollar ended the North American session at C$0.9926 to the greenback, or $1.0075, up slightly from Friday's close of C$0.9932, or $1.0068. Earlier, the Canadian dollar fell to C$0.9964, or $1.0036, its weakest level since Aug. 10. BMO's Perrier said the next major level of support for the Canadian dollar is around parity, which also marks the 100- and 200-day moving averages. Analysts said Canada's dollar will feel longer-term pain from the rejection of the Progress Energy deal, which hinted that Canadian mining and energy companies are off limits to some buyers and may result in a drop in merger and acquisition activity. "It's not just the actual impact of the dollars, it's the whole psychology behind the sentiment, if people believe the story then it has a bigger impact," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto, who nevertheless is projecting the Canadian dollar to appreciate by year-end. The blocked deal could also signal tough times ahead for Chinese state-owned oil group CNOOC's C$15.1 billion offer for oil producer Nexen. "Clearly, having one knockback heightens expectations of a second," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London. Canadian bond prices were mostly lower but outperformed U.S. Treasuries. The two-year bond was up 2 Canadian cents to yield 1.095 percent, while the benchmark 10-year bond fell 30 Canadian cents to yield 1.877 percent. The 30-year bond was down 45 Canadian cents, yielding 2.449 percent.