* C$ closes at C$0.9920 to U.S. dollar, or C$1.0081
* C$ hits 7-month low but regains ground
* Rallies to August high versus euro
* Bond prices rise across curve
By Andrea Hopkins
TORONTO, Sept 12 (Reuters) - The Canadian dollar fell below parity against the U.S. dollar on Monday, touching its weakest level since January, as fears of a Greek default shook markets, but it regained ground to close near the session high.
European stocks weakened as investors worried that a Greek default could spark global market contagion. European equities hit two-year lows and the euro sank to a seven-month low against the U.S. dollar as investors dumped risky assets and fled to the safety of government debt. [MKTS/GLOB]
While the Canadian dollar was sideswiped by the flight to the U.S. dollar, it did better against European currencies and was expected to hug U.S. dollar parity in the near term.
"We certainly see the Canadian dollar weakening towards parity and somewhat through parity, but not dramatically," said David Watt, senior currency strategist at Royal Bank of Canada. "That's just the backdrop with a bit of a U.S. dollar rally that's going to carry some sway."
Watt said the Canadian currency did well against other currencies that are being hit by European and Asian growth fears, including the euro, Swiss franc and Australian dollar, which have outperformed Canada's currency since June.
"As we get more growth concerns relative to the global economy - as opposed to just the U.S. - that could begin to weigh on some of the other currencies that have outperformed the Canadian dollar. So even though the environment is not that good for the Canadian dollar, it could outperform on some of the crosses," Watt said.
Canada's dollar CAD=D4 fell as low as C$1.0027 to the greenback, or 99.73 U.S. cents, its weakest level since Jan. 31, before regaining strength to end at C$0.9920 to the U.S. dollar, or C$1.0081. That was up from Friday's North American close of C$0.9960, or $1.0040.
Against the euro, however, the Canadian dollar ended the North American session at C$1.3553, or 73.78 euro cents, its strongest level since August. The currency also gained against the Swiss franc and the Australian dollar.
"The market as we know turns to the U.S. dollar in times of dire stress and with that we've seen the U.S. dollar continue to push stronger," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"At the end of the day, Canada is still in a better situation than most and although our jobs number wasn't great on Friday it wasn't terrible either."
Concerns that Moody's Investors Service might downgrade the credit-worthiness of French banks, which are widely exposed to Greek bonds, and the continuing lack of a solution to Greece's months-old debt crisis rattled investor confidence.
Investors dumped assets perceived as risky and bought government debt. The yield on benchmark U.S. Treasury 10-year notes briefly slid to its lowest level in at least six decades and 10-year bund yields fell as low as 1.71 percent.
Canadian bond prices edged higher across the curve.
The two-year bond CA2YT=RR was up 18.5 Canadian cents to yield 0.881 percent, while the 10-year bond CA10YT=RR gained 31 Canadian cents to yield 2.147 percent. (Additional reporting by Claire Sibonney; editing by Peter Galloway)