* C$ hits 3-wk low, recovers to end at 97.74 U.S. cents
* Bonds pressured by new issues
* Canada inflation hits 2-year high, prompts rate talk
* Markets jolted by Korean tension, euro zone concerns
By Ka Yan Ng
TORONTO, Nov 23 (Reuters) - Canada's dollar hit a three-week low against the U.S. currency on Tuesday as mounting worries over tensions in Korea and euro zone debt gave a safe-haven boost to the greenback, but it cut its losses by the end of the day, supported by domestic inflation data.
Market players were watching developments after North Korean artillery hit a South Korean island in one of the heaviest attacks on its neighbor since the Korean War ended in 1953.
The incident added to intensifying pressure in global financial markets resulting from concern that a rescue package for Ireland may not stop problems from spreading to other indebted euro zone countries. [MKTS/GLOB]
The currency fell as low as C$1.0265 to the U.S. dollar, or 97.42 U.S. cents. By session's end, however, the Canadian dollar CAD=D4 recovered to close at C$1.0231 to the U.S. dollar, or 97.74 U.S. cents, down from Monday's close at C$1.0175 to the U.S. dollar, or 98.28 U.S. cents.
"It's following the general U.S. dollar move," said John Curran, senior vice president at CanadianForex.
"But the Canadian dollar weakness is being slowed by the (consumer price index) numbers. The general overall risk aversion (is due to) concern about the European situation, and the hostilities in Korea are not helping."
The currency rose to a session high of C$1.0162 to the U.S. dollar, or 98.41 U.S. cents, early in the day after data showed the domestic inflation rate in October jumped to a two-year high, suggesting the Bank of Canada could speed up interest rate hikes.
Canada's annual inflation rate in October rose to a two-year high of 2.4 percent from 1.9 percent in September on higher prices for gasoline and energy, Statistics Canada said. The annual core inflation rate rose to 1.8 percent from 1.5 percent in September. [ID:nN23105406] ECONCA
Most analysts don't expect the Bank of Canada to resume rate hikes until the new year. While the inflation rate came in above the midpoint of the central bank's inflation target, analysts said a clear trend of rising prices would have to emerge before the Bank of Canada acted.
"It's certainly higher than the Bank of Canada's average outlook for what's going to happen in Q4 for the price increases so it's constructive as far as that goes. But of course one data point does not make a trend," said Sacha Tihanyi, currency strategist at Scotia Capital.
Other data showed Canadian retail sales increased by 0.6 percent in September from August, in part due to higher sales at motor vehicle and parts dealers. Market analysts had expected a 0.7 percent advance. [ID:nN23127322]
BUSY SLATE OF NEW BOND ISSUANCE
Canadian government bond prices were mildly lower across the curve on Tuesday, unable to fully benefit from the flight to safety ignited by news of the Korea tensions.
"In Canada, we're just down marginally. The focus in our session was new issuance. That might be depressing our government bonds a bit," said Sheldon Dong, fixed income analyst, at TD Waterhouse Private Investment.
At least C$875 million in new issues were offered on Tuesday, with long-dated deals from 407 International and AltaGas. [ISU-CAN]
The two-year government of Canada bond CA2YT=RR was down 8 Canadian cents to yield 1.656 percent, while the 10-year bond CA10YT=RR fell 17 Canadian cents to yield 3.107 percent. (Reporting by Ka Yan Ng; editing by Peter Galloway)