* C$ makes small gains as equities, oil rise
* Canadian dollar gains 0.9 pct in March
* Canada economy shrinks 0.7 pct in Jan., as expected
* Bonds up as data confirms soft economy (Updates to close)
By Ka Yan Ng
TORONTO, March 31 (Reuters) - The Canadian dollar notched tiny gains against the U.S. currency on Tuesday, aided by firmer equity markets and a rebound in oil, but economic data weighed.
Oil prices and equity markets see-sawed through the day and the Canadian dollar tracked their moves. Crude settled about 3 percent higher, at nearly $50 a barrel, maintaining key support for the currency. Canada is a major exporter of oil, and the currency often moves with oil prices. Meanwhile, major North American stock indexes climbed more than 1 percent.
The Canadian dollar finished at C$1.2613 to the U.S. dollar, or 79.28 U.S. cents, up from C$1.2618 to the U.S. dollar, or 79.25 U.S. cents, at Monday's close. It finished the month 0.86 percent higher than it was at the end of February.
The currency fell sharply on Monday, when auto sector woes drove it to almost a two-week low against the greenback.
It rose as high as C$1.2503 to the U.S. dollar, or 79.98 U.S. cents, and fell as low as C$1.2655 to the U.S. dollar, or 79.02 U.S. cents, on Tuesday.
"It's still hanging on," said Mark Chandler, fixed income strategist at RBC Capital Markets.
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 data underscored the fragility of the North American economy despite rallying equity markets.
The appeal of safe haven government bonds is often curbed when riskier assets such as stocks are favored. Although North American equity markets finished higher, they had no dampening impact on bond prices.
The data was the primary support as the January gross domestic product figures confirmed weakness in the Canadian economy, and U.S. data showed little sign that the lengthy U.S. recession is hitting bottom.
U.S. home prices plunged at a record pace, while U.S. consumer confidence in March held just above record lows. The Chicago purchasing managers index, a measure of business activity, also fell this month. [ID:nN31416180]
"The data was more supportive of the bond move. The three major U.S. indicators today came in below expectations and the guts of those reports for the most part were also soft," Chandler said.
Economists figure the drop in Canadian GDP in January will likely lead to a decline of at least 6 percent in the first three months of the year, probably the steepest quarterly contraction on record. [ID:nN31403813]
"It looks like Q1 growth is coming in worse than the Bank of Canada anticipated so they'll probably cut rates again in a few weeks and lay the groundwork for quantitative easing," said Sal Guatieri, senior economist at BMO Capital Markets.
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.
The two-year bond gained 9 Canadian cents to C$100.37 to yield 1.076 percent. The 10-year bond advanced 34 Canadian cents to C$108.50 to yield 2.783 percent.
The 30-year bond rose 65 Canadian cents to C$125.45 to yield 3.561 percent. The U.S. 30-year bond yielded 3.549 percent.
Canada bonds outperformed across the belly of the curve, but underperformed on the short- and long-dated issues. The 30-year bond yield was 1.2 basis points above its U.S. counterpart, compared with 0.8 basis points below on Monday. (Editing by Peter Galloway)