* C$ pares losses to $1.0127
* Bond prices soar on safety bid
* Japan braces for potential radiation catastrophe (Adds details, updates prices)
By Ka Yan Ng and Claire Sibonney
TORONTO, March 15 (Reuters) - The Canadian dollar dived to its lowest level in more than four weeks against the U.S. dollar on Tuesday morning as the market rushed to the safe-haven greenback on growing fears of a radiation catastrophe in Japan.
Aversion to risk also drove world stock markets lower with Japanese equities falling more than 10 percent .N225, and most North American stock indexes down around 2 percent. The price of oil -- usually a leading factor in the Canadian dollar's direction -- also dropped sharply. [MKTS/GLOB] [O/R]
Japan faced a catastrophe after an earthquake-crippled nuclear power plant exploded and sent low levels of radiation floating towards Tokyo. [ID:nLDE72D2FT]
"Going forward I think this crisis too will pass, the market is trying to grapple for information and see the extent of the contagion and just how bad it's going to be," said Firas Askari, head of foreign exchange trading at BMO Capital Markets.
The Canadian dollar fell as low as C$0.9974 to the U.S. dollar, or $1.0026, its weakest point since Feb. 11, plunging out of the range between C$0.97 and C$0.98 that it had been locked in for most of the past two weeks.
"The whole stampede into risk aversion is forcing this U.S. dollar/Canada correction," said Mike O'Neill, managing director at Knightsbridge Foreign Exchange. He said that if the currency breaches C$0.9980, it could set the stage for a return to C$1.0240, a level not seen since December.
He said the Canadian dollar has been "extremely overbought" for some time, and that a correction has long been overdue.
The move was dramatic and volumes were strong. By 10:15 a.m. (1415 GMT), the Canadian dollar had already rebounded a penny from the day's low, trading at C$0.9875 to the U.S. dollar, or $1.0127. But it was still down from Monday's close of C$0.9726 to the U.S. dollar, or $1.0282.
"There has been a good supply of U.S. dollars all the way up, to be frank, the volumes have been pretty good and we're seeing some longer-term players actually buying cheaper Canada," Askari said.
"I do like buying Canada. I just think you have to be very nimble, especially on a day like today. Strategically you probably want to start buying some Canadian dollars anywhere above C$0.99."
Bonds were well-supported by the flight-to-safety bid, pushing prices higher across the curve. The two-year Canadian government bond CA2YT=RR surged 22 Canadian cents to yield 1.557 percent, while the 10-year bond CA10YT=RR advanced 30 Canadian cents to yield 3.187 percent.
Market players also looked ahead to Tuesday's U.S. Federal Reserve policy meeting, which was expected to result in no change in policy stance. The U.S. central bank meeting's "importance is diminishing" said O'Neill, pointing to the focus on Japan developments.
Earlier, Canadian data that showed that productivity rose more last year than in any year since 2005 was overshadowed by the Japan news. [ID:nN15227998] (Reporting by Ka Yan Ng; editing by Peter Galloway)