* Canadian dollar hits 92.73 U.S. cents, then pares gains
* First-quarter GDP data treated as benign
* Bond prices lower on sharp stock market rise (Updates to close)
By Ka Yan Ng
TORONTO, June 1 (Reuters) - The Canadian dollar eked out a small gain versus the U.S. currency on Monday, but was unable to hold on to the near eight-month high it hit overnight as market players took a breather after the currency's recent surge.
The Canadian dollar, boosted by risk appetite, rallied overnight to hit C$1.0784 to the U.S. dollar, or 92.73 U.S. cents, its highest level since Oct. 3, extending the climb it embarked on after falling to a four-year low in early March.
It rose 9.3 percent rise in May, its biggest monthly gain since at least October 1950, according to Bank of Canada data that dates back to 1950.
But as Monday's session wore on, the Canadian dollar drifted lower, tracking the euro. [ID:nN01264640]
"It comes down to the fact that the market is extremely short U.S. dollars right now and it's a pretty crowded dance floor of people who are long Canada," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"So a paring back of risk in conjunction with the GM news today, the Bank of Canada (interest-rate announcement) on Thursday and all the payroll numbers...it's no big surprise to see the market take back some of those positions that it's been so eager to put on over the last few weeks."
The Canadian dollar finished at C$1.0910 to the U.S. dollar, or 91.66 U.S. cents, up from C$1.0917 to the U.S. dollar, or 91.60 U.S. cents, at Friday's close.
The Canadian dollar's rise from its March low has been credited to a combination of higher prices for key Canadian commodities, some upbeat economic data and falling demand for the U.S. dollar.
The market treated as benign news on Monday that Canada's economy contracted 5.4 percent in the first quarter, the fastest pace of decline since 1991, pushing the country into its sharpest two-quarter downturn on record. [ID:nN01454666]
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.
Canadian bond prices were lower across the curve as stock markets rose sharply on optimism over economic recovery. Stocks and bonds typically trade inversely to one another depending on risk appetite.
Market watchers said some of the drop may have been related to a massive amount of June 1 coupon payments hitting the market on Monday, which may be reinvested further out in the curve.
"Canada's bond market is in the midst of a very important day of its own, the June 1 curve extension," said Eric Lascelles, chief economics and rates strategist at TD Securities.
Although Canada's first-quarter GDP data came in better than expected, market players were confident the Bank of Canada was unlikely to stray from its recent pledge that it will keep its benchmark interest rate unchanged at 0.25 percent for at least the rest of the year. [ID:nN01248280]
The benchmark two-year government bond fell 8 Canadian cents to C$99.96 to yield 1.270 percent, while the 10-year bond lost 35 Canadian cents to C$102.40 to yield 3.464 percent.
The 30-year bond eased 20 Canadian cents to C$115.90 to yield 4.046 percent. (Additional reporting by Scott Anderson; editing by Peter Galloway)