(Repeats to add CANADA FX DEBT tag to headline. No changes to text)
* M&A talk and tamed risk aversion help support C$
* C$ gain follows Tuesday's 1.6 percent skid
* Bond prices trickle lower on Obama housing plan (Recasts with comments and closing numbers)
By Frank Pingue
TORONTO, Feb 18 (Reuters) - Canada's dollar closed higher versus the U.S. greenback on Wednesday given a combination of merger-related interest and improved investor sentiment after a U.S. government plan to help homeowners.
The rebound in the Canadian currency helped it to reclaim a portion of the 1.6 percent drop it suffered during the previous North American session when investors raced to the low-yielding greenback on concerns about a deepening global recession.
"Risk sentiment has slightly improved and so the Canadian dollar gained a little bit on that," said Tyson Wright, senior foreign exchange trader at Custom House, a currency services firm in British Columbia.
"But we are still in a range and any selling in dollar/CAD is met with some buying pressure and that's why we are still hovering around the C$1.26 level."
The Canadian dollar closed at C$1.2581 to the U.S. dollar, or 79.48 U.S. cents, up from C$1.2637 to the U.S. dollar, or 79.13 U.S. cents, at Tuesday's close.
Earlier in the session, the Canadian dollar rallied as high as C$1.2530, or 79.81 U.S. cents, a move some experts said was supported by talk of potential bidders for a stake in a Teck Cominco TCKb.TO coal operation, said to be worth about $2.5 billion.
"The market sees that and the potential implication of some more M&A flow and that gave the currency a short-term boost," said Shane Enright, currency strategist CIBC World Markets. "But if a deal doesn't get announced imminently I would say the market would quickly lose interest the story."
The Canadian dollar also drew some support from oil prices that, while lower, did not add significantly a near 7-percent fall on Tuesday. Canada is a key oil producer and its currency is often influenced by price swings in the commodity.
BOND PRICES ALL END LOWER
Canadian bond prices did not receive any boost from soft domestic data and instead followed U.S. Treasuries to a lower close across the curve after U.S. President Barack Obama unveiled a plan to stem foreclosures.
Bond prices were down for much of the session and never recovered after Obama pledged up to $275 billion to help stem a wave of home foreclosures that sparked the U.S. financial meltdown. [ID:nN17400254]
Data that showed Canada's wholesale trade fell 3.4 percent in December from November, the biggest drop in over five years and steeper than analysts had predicted, had no noticeable impact on bonds.[ID:nN18424182]
"We know the data is bad, so unfortunately people are just getting desensitized," said Sheldon Dong, fixed-income analyst at TD Waterhouse Private Investment. "Bonds were down early in the morning and they just stayed down, it's just a lack of market liquidity more than anything else."
The domestic economy is widely expected to contract in the first quarter and the Bank of Canada is seen as likely to cut its key interest rate again in March, which makes weak economic data reports less likely to cause a market move.
Canadian data still due this week are January's composite leading indicator on Thursday and the closely watched consumer price index report for January due on Friday.
The interest-rate sensitive two-year bond fell 14 Canadian cents to C$102.62 to yield 1.255 percent, while the 10-year bond dropped 40 Canadian cents to C$111.30 to yield 2.854 percent.
The 30-year slipped 70 Canadian cents to C$125.00 to yield 3.586 percent.
Canadian bonds outperformed U.S. Treasuries across the curve. The Canadian 30-year bond yield was about 5 basis points above its U.S. counterpart, compared with 7.8 basis points on Tuesday. (Editing by Jeffrey Hodgson)