* Q2 loss C$1.36/shr vs year-earlier profit C$1.09/shr
* Weaker stocks, low bond yields force reserve increases
* Shares drop 8 percent (Adds details, stock moves)
TORONTO, Aug 5 (Reuters) - Manulife Financial Corp (MFC.TO) posted a steep quarterly loss on Thursday, falling short of analysts' estimates due to sharp declines in equity markets and bond yields.
Its shares were down 8 percent in early trading.
Canada's largest life insurer, which a year ago cut its dividend in half in a campaign to rebuild capital levels, said it lost C$2.4 billion ($2.3 billion), or C$1.36 a share, in the second quarter, ended June 30.
That compared with net income of C$1.8 billion, or C$1.09 a share, in the year-earlier period.
Analysts polled by Thomson Reuters I/B/E/S had expected, on average, a loss of 60 Canadian cents a share.
"Our results for the second quarter were disappointing," Manulife Chief Executive Donald Guloien said in a statement.
The Toronto-based company, which operates under the John Hancock banner in the United States, said the decline of global stock markets during the quarter stripped C$1.7 billion from its bottom line, while lower interest rates led to a C$1.5 billion profit hit.
Canadian stocks, as measured by the S&P/TSX composite index .GSPTSE, fell 6.2 percent during the second quarter, while corporate bond yields declined, in part due to a flight to quality by shaken holders of European debt.
The weaker stock prices and bond yields -- which hurt Manulife's return on the assets it holds -- forced the company to increase reserves to cover obligations to policyholders.
The company said the impact on profit could reverse itself if bond yields move upward and stock markets advance, a move Guloien said has already begun.
"The turnaround in equity markets in July alone, if sustained, should reverse a substantial portion of these losses," he said.
The TSX index has risen 4.5 percent since the beginning of July.
Adjusted earnings from operations, a measure Manulife uses to gauge ongoing profit strength, was C$658 million, below the company's estimate of adjusted earnings of C$700 million-C$800 million for each quarter of 2010.
The weak markets also took a bite out of Manulife rival Sun Life Financial (SLF.TO) during the quarter.
Sun Life said on Wednesday its profit fell by 60 percent due to the market conditions.
Great-West Lifeco (GWO.TO), Canada's other large insurer, reported a slightly higher second-quarter profit on Wednesday as it recorded strong sales in certain markets.
Shares of Manulife were down C$1.28 at C$14.72, while Sun Life sank 3.3 percent to C$27.65.
Great-West slipped 0.3 percent to C$25.12. ($1=$1.01 Canadian) (Reporting by Cameron French; editing by Peter Galloway)