* C$ rises to C$0.9733 to the U.S. dollar, or $1.0274
* Bonds slide
* Gasoline fuels May inflation jump in Canada
* Rate hike debate reopened (Adds details)
TORONTO, June 29 (Reuters) - The Canadian dollar rose almost a penny to to its highest in nearly a week against the U.S. dollar on Wednesday following higher-than-expected May Canadian inflation data that sparked debate about an interest rate hike by the end of the year.
Government bond prices were lower, weighed by the possibility of rate hikes which the market had previously discounted as unchanged for rest of year because of broader global pressures.
Canadian inflation shot up to 3.7 percent in May to the highest rate since March 2003, well above expectations and far above the Bank of Canada's 2.0 percent target. [ID:nN1E75S02V]
The month-on-month rise in prices more than doubled to 0.7 percent from 0.3 percent in April. Analysts expected the monthly rate to fall to 0.2 percent, and saw the annual rate holding steady at 3.3 percent. The April rate was 3.3 percent.
"Core inflation has also grinded up over the last few months, so therefore we cannot toss away the possibility of a hike in 2011," said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.
The Bank of Canada has said inflation would be above 3.0 percent -- it has a target rate of 1.0 percent to 3.0 percent -- "in the short term" before returning to 2.0 percent by mid-2012.
Its core measure, which excludes volatile items such as gasoline, fruit and vegetables, rose to 1.8 percent from the 1.6 percent in April and the forecast by analysts for May.
Swaps markets have been reducing bets on when the Bank of Canada might next raise interest rates. A Bank of Canada poll on May 31 had shown most primary dealers expect a rate hike in September, but some of those expectations have since shifted as well.
Part of the reason for the shift is that the Canadian economy hit a soft patch, and combined with a highly uncertain global outlook, it could mean the Bank of Canada will be in no rush to raise its key interest rate from the current ultra-low 1.0 percent.
"I still think we're in such a risk-filled economic environment, that the Bank of Canada is inclined to wait and see how things play out before once again resuming their rate hiking cycle," said Craig Alexander, chief economist at Toronto Dominion Bank.
Growing optimism that Greece's parliament would pass an austerity plan critical to avoiding a debt default also favored riskier assets on Wednesday, with global stocks on the rise as well as the price of oil. [MKTS/GLOB]
At 8 a.m. (1200 GMT), the currency CAD=D4 was at C$0.9733 to the U.S. dollar, or $1.0274, up from Tuesday's North American finish at C$0.9827 to the U.S. dollar, or $1.0176.
It had climbed as high as C$0.9723 to the U.S. dollar, or $1.0285 shortly after the data, rising about half a cent from pre-data levels.
The two-year bond CA2YT=RR dropped 18 Canadian cents to yield 1.533 percent, while the 10-year bond CA10YT=RR fell 51 Canadian cents to yield 3.048 percent. (Reporting by Solarina Ho and Ka Yan Ng; Editing by Jeffrey Hodgson)