CANADA FX DEBT-C$ falls more than a penny to weakest since March

* C$ drops to C$0.9930 to the U.S. dollar, or $1.0070

* Weakest since March, traders eye US$ parity

* Bond prices jump as investors continue to exit risk

TORONTO, Aug 8 (Reuters) - Canada’s dollar weakened to a near five-month low against the U.S. currency on Monday, approaching parity, as global fear about a possible double-dip U.S. recession and European and U.S. debt crises weighed.

The euro also fell against the dollar, down more than 1 percent, while the yen gained broadly as investors sought Japan’s safe-haven currency given tumbling global stocks. [FRX/]

“A number of important benchmark markets around the world are in bear market territory now ... so this is an environment where risk aversion is probably going to persist,” said Shaun Osborne, chief currency strategist at TD Securities.

“In that kind of environment we would expect the Canadian dollar to continue underperforming.”

Equity markets dropped on Monday in the third day of fevered selling as investors fled riskier assets in the wake of the weekend downgrade of U.S. sovereign debt and continued worries of a contagion of European debt.

U.S. and Toronto stocks were both down more than 2 percent in mid-morning trade. [.N][.GSPTSE]

The Canadian dollar CAD=D4 fell as low as C$0.9930 to the U.S. dollar, or $1.0070, its weakest since March 17.

At 11:20 a.m. (1520 GMT) it had regained a little ground, at C$0.9885 to the U.S. dollar, or $1.0117, still well below Friday’s North American session close at C$0.9781 to the U.S. dollar, or $1.0224.

The Canadian dollar, which was within striking distance of hitting a modern-day high not even a month ago, has lost more than 5 cents since late July, swept up in the global sell-off of riskier assets. [ID:nN1E76K0DV]

Osborne said a lot of technical signals suggest the U.S. dollar may continue to rally against Canada’s commodity-linked currency and even break through parity. The Canadian and U.S. currencies were last equal in February.

Deep-rooted jitters after Standard & Poor’s cut the U.S. debt rating from its top-notch level on Friday sent world stocks towards a 11-month low, overshadowing relief that the European Central Bank was buying bonds of euro zone strugglers Italy and Spain. [MKTS/GLOB]

The price of oil, a key Canadian export, dropped more than 3 percent to below $84 a barrel. [O/R]

Investors were seemingly unimpressed by weekend talks between the Group of Seven industrialized countries aimed at safeguarding the smooth functioning of financial markets following the U.S. debt rating cut to AA-plus from AAA.

Uncertainty over economic growth in the United States is a major factor putting pressure on the Canadian dollar, the U.S. being Canada’s biggest trading partner.

“Canada still has a number of safe-haven elements to it, but so long as you’ve got intense uncertainty about the U.S. and global growth outlooks, they’re not necessarily going to shine through,” David Watt, senior currency strategist at RBC Capital Markets.

Government bonds pushed sharply higher, shaking off the S&P downgrade as stocks bore the brunt of the flight from risk.

Canada's two-year bond CA2YT=RR jumped 43 Canadian cents to yield 0.849 percent, while the 10-year bond CA10YT=RR climbed C$1.37 cents to yield 2.487 percent.

Canadian government bonds outperformed short- and medium-term U.S. Treasuries following the downgrade. But a surge in safe-have demand for long-term U.S. debt on jitters about the economy meant Canada underperformed at the long end. (Editing by Jeffrey Hodgson)