* C$ recovers as stocks firm, but oil pressures
* Canada economy shrinks 0.7 pct in Jan., as expected
* Bonds up moderately as data confirms soft economy (Updates with bond movement, additional comments)
By Ka Yan Ng
TORONTO, March 31 (Reuters) - The Canadian dollar climbed against the U.S. currency on Tuesday, spurred by firmer equity markets and recovering a portion of the previous session's big losses.
The threat of bankruptcy at General Motors GM.N and Chrysler drove the Canadian dollar to almost a two-week low against the greenback on Monday as the U.S. dollar benefited from a flight to safety.
At 9:50 a.m. (1450 GMT), the Canadian unit was at C$1.2590 to the U.S. dollar, or 79.43 U.S. cents, up from C$1.2618 to the U.S. dollar, or 79.25 U.S. cents, at Monday's close.
At one point on Tuesday, the Canadian unit rose as high as C$1.2503 to the U.S. dollar, or 79.98 U.S. cents.
"As equity markets rally, that tends to lower levels of risk aversion and it tends to point to a slightly more optimistic outlook for the markets and the global economy," said George Davis, chief technical strategist at RBC Capital Markets.
"The Canadian dollar tends to benefit from that type of backdrop."
The price of oil turned lower, below $49 a barrel, taking away some of the support it had given the currency earlier in the day when it neared $50 a barrel. Canada is a major exporter of oil and the currency often tracks its movements.
In economic news, declining manufacturing production led Canada's economy to shrink 0.7 percent in January from December, within expectations. [ID:nN31397290]
Separately, Canadian industrial prices rose in February for the first time since August, gaining 0.4 percent due to a weakening currency and increases in petroleum and precious metals prices. [ID:nN31397459]
BONDS MODESTLY HIGHER
Canadian government bond prices were slightly higher across the curve as the gross domestic product data confirmed the weakness in the Canadian economy.
"It's set us up for a pretty hefty decline in the first quarter, probably the worst quarterly contraction on record," said Sal Guatieri, senior economist at BMO Capital Markets, who estimates at least a 6 percent first-quarter GDP decline.
"It looks like Q1 growth is coming in worst than the Bank of Canada anticipated so they'll probably cut rates again in a few weeks and lay the groundwork for quantitative easing."
The Bank of Canada has said it would unveil its proposed framework for so-called quantitative and credit easing -- printing money to buy securities outright on the market -- in late April. Several other central banks have undertaken such measures and the Bank of Canada is expected to follow suit to some degree.
North American equity markets were on the rise, but had no dampening impact on bond prices on Tuesday. The appeal of safe haven government bonds is often curbed when riskier assets such as stocks are favored.
The two-year bond edged up 1 Canadian cent to C$100.29 to yield 1.113 percent. The 10-year bond rose 19 Canadian cents to C$108.35 to yield 2.799 percent.
The 30-year bond rose 20 Canadian cents to C$125 to yield 3.583 percent. The U.S. 30-year bond yielded 3.577 percent. (Additional reporting by Jennifer Kwan; editing by Peter Galloway)