* Q1 GDP shrinks 5.4 pct, but better than expected
* Canadian dollar hits 92.73 U.S. cents, pares gains
* June 1 government bond maturities may spur long end rise (Updates with GDP figures and reaction)
TORONTO, June 1 (Reuters) - The Canadian dollar retained a firmer tone versus the U.S. currency on Monday, but still off overnight highs, as the first-quarter Canadian economic growth was not as weak as expected.
Canada's economy contracted 5.4 percent in the first quarter, at the fastest pace since 1991, pushing the country into its sharpest two-quarter downturn on record, government data showed.
Analysts had expected a 6.6 percent drop.
"It's hard to put a positive spin on such a deep drop in GDP, but the fact is that it wasn't as bad as expected and there are lots of signs to suggest that things have improved immeasurably since the first quarter, so I think overall, this is not bad news," said Doug Porter, deputy chief economist at BMO Capital Markets.
The currency was already on the rise versus the U.S. dollar on Monday, boosted by risk appetite, but had pared gains ahead of domestic data. It rallied overnight to hit C$1.0784 to the U.S. dollar, or 92.73 U.S. cents, its highest since Oct. 3, extending its climb since falling to a four-year low in early March.
At 9:35 a.m. (1335 GMT), the unit was at C$1.0868 to the U.S. dollar, or 92.01 U.S. cents, up from C$1.0917 to the U.S. dollar, or 91.60 U.S. cents, at Friday's close.
"What we're seeing is a very positive start to the week for risky assets," Matthew Strauss, senior currency strategist, RBC Capital Markets. "Two factors behind it are a very strong return to riskier asset classes and broad-based U.S. dollar selling."
Strauss said the Canadian dollar fell back a bit ahead of the Canadian gross domestic product data, but the retreat is more likely due to a pause after a strong rally overnight.
"We had some very aggressive moves overnight and we have some stock taking as North America opens," he said.
World stocks and oil rallied to fresh 2009 highs on Monday after signs of improvement in global factory activity added to optimism the global economy may be on the road to recovery. [MKTS/GLOB]
The Canadian dollar has steadily climbed above its March low, a move credited to a combination of higher prices for key Canadian commodities, some upbeat economic data and lower demand for the U.S. dollar.
In May, the unit rallied 9.3 percent, its biggest monthly gain since at least October 1950, according to Bank of Canada data that dates back to 1950.
BONDS MOSTLY LOWER
Canadian bond prices were mostly lower except in the longest-dated maturity, as the government data did not spur a sharp reaction.
"We haven't seen a particularly compelling move," said Eric Lascelles, chief economics and rates strategist at TD Securities. "The situation looks far less grim. I would presume the market is taking some heart in that.
Instead, there may be some moves related to the June 1 maturities hitting government bonds on Monday where a massive amount of coupon payments are being paid out and potentially being reinvested further out in the curve.
"Of course, Canada's bond market is in the midst of a very important day of its own, the June 1 curve extension," said Lascelles.
"One wonders whether the bond market might have bigger fish to fry than a regular old economic report -- as much as this is clearly and important one," he added.
The benchmark two-year government bond fell 5 Canadian cents to C$99.99 to yield 1.255 percent, while the 10-year bond dipped 2 Canadian cents to C$102.75 to yield 3.423 percent.
The 30-year bond jumped 40 Canadian cents to C$116.50 to yield 4.013 percent. (Reporting by Ka Yan Ng, Jennifer Kwan, and Scott Anderson; Editing by Jeffrey Hodgson)