WRAPUP 1-Canada job losses, weak housing starts reflect slowdown

* Economy sheds 21,900 jobs, jobless rate drops to 7.0 pct

* Housing starts plunge in January to 160,577 units

* December trade deficit narrows

* Bank of Canada may further soften rate-hike stance

OTTAWA, Feb 8 (Reuters) - Canada's economy unexpectedly shed 21,900 jobs in January, delivering a reality check after months of outsized employment growth and confirming forecasts of slowing economic expansion.

A drop in the number of people seeking work pushed the unemployment rate down to a four-year low of 7.0 percent, Statistics Canada data said on Friday.

And in a sign the Canadian housing market is cooling far faster than expected, housing starts fell steeply in January to 160,577 units from 197,118 in December, according to the Canada Mortgage Housing Corp.

On a more upbeat note, Statscan said Canada's trade deficit in December decreased by almost half to C$901 million from the previous month. Canada's trade gap hit a record high of C$11.92 billion for 2012 as a whole.

Analysts had expected employment growth to slow in January but were taken aback by the magnitude of the downturn.

"Bit of a surprise," said Michael Gregory, chief economist at BMO Capital Markets. "This number has to be taken in the context of what has happened in the months before, so the underlying trend is probably more reflective now of the overall economy," he said.

The Canadian dollar slipped as low as C$1.0037 to the U.S. dollar, or $0.9963, its lowest level since Jan. 30, reflecting both sets of weaker-than-expected data.

Market analysts had forecast a gain of 5,000 positions and predicted the jobless rate would edge up to 7.2 percent from 7.1 percent in December after strong job gains in three of the previous four months.

They had expected 195,000 January housing starts.

The jobs data could push the Bank of Canada off its slightly hawkish tilt, said Mark Chandler, strategist at RBC Capital.

The central bank has been saying for months that it will need to increase, not cut, interest rates, although in January it said that move was "less imminent."

"There's a chance given the way the data has come in that they could remove the (tightening) bias completely, but there's still quite a bit of data through to the next meeting," said Chandler.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed traders lowered their already small bets on a rate hike in late 2012.

The economy lost about 20,600 full-time and 1,400 part-time jobs in January, with the hard-hit manufacturing sector shedding 21,600 positions. An increase in the number of self-employed was outweighed by job losses among private and public sector employees.

January's unemployment rate was the lowest since the 6.8 percent recorded in December 2008 but still well above the 6.1 percent before the 2008 economic crisis.

The average hourly wage of permanent employees increased by 2.0 percent from January 2012, down from 2.5 percent year-over-growth in December.