* C$ hits session low of 99.40 U.S. cents
* Bonds softer across curve
* Flaherty says challenge to employment numbers
* Flaherty: 50 percent chance of election (Recasts, adds details, comments)
By Claire Sibonney
TORONTO, Jan 31 (Reuters) - The Canadian dollar slipped below parity against the U.S. dollar to its lowest level this year on Monday after Finance Minister Jim Flaherty commented on employment and the chances of a snap election.
The currency CAD=D4 skidded almost a penny to as low as C$1.0060 to its U.S. counterpart, or 99.40 U.S. cents, its weakest level since Dec. 28.
The Canadian dollar had rallied above parity earlier in the day after data showed monthly domestic growth beat expectations and as fears over political turmoil in Egypt eased up a bit.
Flaherty told reporters he expects Canada to have a challenge in increasing employment, pointing to the need for the private sector to pick things up. He also said he saw a 50 percent chance that his upcoming budget, to be presented in March, will be defeated in Parliament, which would trigger an election. [ID:nN31230433]
Canada's employment report for January will be released on Friday and on average analysts expect a gain of 15,000 jobs in the month, according to Reuters estimates. [ID:nN28144465]
"(Flaherty's) forward-looking comment on employment I think perhaps alerted people to the risk that Friday's numbers might be a bit weaker than expected," said Shaun Osborne, chief currency strategist at TD Securities.
"It's probably a bit too early for him to know any specifics on the data, but I think that's really what the market is reacting to."
At 12:49 p.m. (1749 GMT), the Canadian currency was C$1.0016 to the U.S. dollar, or 99.84 U.S. cents, down from Friday's North American close of C$1.0011 to the U.S. dollar, or 99.89 U.S. cents, which marked the Canadian dollar's first finish below parity with the greenback in a month.
Osborne said stop-loss orders accumulated around the C$1.0010-20 area, with the currency breaking stiff short-term support levels around the C$1.0030-35 area. The move also marked a break of a significant downtrend for the U.S. dollar on the charts going back more than two years.
The next key support level for the Canadian dollar, he noted, is a technical retracement at C$1.0067. Osborne said he expected trading to consolidate for the rest of the day.
"The Canadian dollar probably was liable to soften up a little anyway. CAD is still somewhat susceptible to the risk-on, risk-off kind of environment, we saw that very clearly on Friday," he said.
"Risk appetite today has probably come back a little bit but the Canadian dollar just doesn't seem to be able to benefit ... It just says to me that people aren't keen on the Canadian dollar at the moment."
Canadian bond prices were slightly softer across the curve, tracking U.S. Treasuries, as investors took profits from a flight-to-safety rally driven by mounting unrest in Egypt.
The two-year bond CA2YT=RR was off half a Canadian cent to yield 1.681 percent, while the 10-year bond CA10YT=RR fell 26 Canadian cents to yield 3.278 percent. (Reporting by Claire Sibonney; editing by Peter Galloway)
