* C$ falls 1.4 percent to C$1.0670 to the U.S. dollar
* Stock reversal, commodity drop drive currency lower
* Canadian bonds mostly weaker, but outperform U.S.
TORONTO, Oct 26 (Reuters) - The Canadian dollar dropped to its lowest level in almost three weeks on Monday as commodity prices fell and investors fled risk, keeping a wary eye on the Bank of Canada as they went.
North American stock markets reversed early gains as prices for commodities such as oil and gold fell and risk aversion increased, prompting investors to embrace the perceived safety of the U.S. dollar.
"Canada's been strongly linked to not only commodity markets but global risk," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
Oil fell more than 2 percent to below $79 a barrel on concerns that a sluggish economic recovery will keep global demand low, while gold dropped to a two-week low below $1,040 an ounce.
The Canadian dollar often follows the lead of oil and metals prices due to the country's high degree of dependence on resource exports.
Adding to the cautious tone, Bank of Canada Governor Mark Carney reiterated a warning he gave last week that the Canadian currency's rally towards parity with the greenback was a risk to growth. [ID:nBAC002343]
The currency retreated after Carney's initial warning and his suggestion that the bank might consider intervening in markets to slow the currency's rise.
The Canadian dollar ended at C$1.0670 to the U.S. dollar, or 93.72 U.S. cents, its lowest level since Oct. 6. That was down from C$1.0519 to the U.S. dollar, or 95.07 U.S. cents, at Friday's close.
"Call it short-covering, call it awareness and respect of Governor Carney, but the Canadian dollar was due for a corrective phase," Spitz said.
"I think this is somewhat healthy in as far as the currency had been more or less in a linear movement (higher)."
BOND PRICES LOWER
Canadian bond prices retreated across the curve, but particularly among longer-dated issues as they took their lead from U.S. Treasuries.
Bonds slightly outperformed U.S. debt, which declined ahead of a week that will see billions of dollars of new debt hit the market.
"Everybody's worried about U.S. supply this week," said Sheldon Dong, fixed-income analyst at TD Waterhouse Private Investment.
The Canadian economic calendar will be quiet until September producer price and raw materials price data are released on Thursday, followed by August gross domestic product on Friday.
The two-year bondslipped 2 Canadian cents to C$99.41 to yield 1.538 percent, while the 10-year bond retreated 35 Canadian cents to C$101.60 to yield 3.551 percent.
The 30-year bonddeclined 75 Canadian cents to C$116.25 to yield 4.019 percent. (Reporting by Cameron French; editing by Peter Galloway)
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