CANADA FX DEBT-C$ falls, bond prices rise as GDP data disappoints

(Updates market action, adds quote)

* GDP rose 2.9 pct in Q2, growth stalled in June

* Traders see little chance BOC hiking rates next week

* Higher oil prices, hopes for NAFTA deal limit C$ losses

* Canadian bond prices rise, yield curve flattens

Aug 30 (Reuters) - The Canadian dollar fell versus the greenback on Thursday as data showed the economy grew at a slower pace in the second quarter than forecast, supporting traders' view the Bank of Canada will leave key interest rates on hold next week. Prices on domestic government debt rose in the wake of the latest gross domestic product figures, flattening the yield curve on the notion of slowing economic growth amid U.S.-Canada trade talks. Still increasing oil prices and optimism that Ottawa will secure a deal in a revamped North American Free Trade Agreement (NAFTA) limited loonie's losses and the rise in bond prices, traders said. "Canada's Q2 GDP has missed the mark marginally, disappointing investors," said Stephen Innes, head of trading in Asia with Oanda in Singapore. "It's still a substantial number Canada's economy grew at a 2.9 percent annualized rate in the second quarter, the fastest in a year but a tad slower than the 3.0 percent pace seen among analysts polled by Reuters. GDP was unchanged in June, compared with an expected 0.1 percent increase, Statistics Canada said on Thursday.

At 10:03 a.m. (1403 GMT), the loonie was down

nearly 0.7 percent at C$1.2993 per U.S. dollar or 76.93 U.S.

cents per Canadian dollar , Reuters data showed.

The Canadian currency would readily reverse its decline if Washington and Ottawa arrive at a new NAFTA deal by a Friday deadline, analysts said. Canadian Foreign Minister Chrystia Freeland said late on Wednesday that talks were at "a very intense moment" but added there was "a lot of good will" between Canadian and U.S. negotiators. Canada sends about 75 percent of its exports to the United States, so its economy could benefit if a trilateral trade deal with the United States and Mexico is reached. If the trade picture improves, Canada stands to benefit from the recent pickup in oil prices.

Benchmark Brent crude futures were up 0.5 percent at

$77.53 a barrel on signs of tightening global supply and lower U.S. energy inventories. Amid trade uncertainties, traders seemed confident the Bank

of Canada will leave its policy rate at 1.50 percent

at its Sept. 5 meeting. This BOC view, reinforced by the mildly disappointing GDP data, propelled prices of Canadian bonds, particularly longer-dated ones, higher, flattening the yield curve. The spread between two-year and 10-year Canadian yields shrank nearly 1 basis point to 15.80 basis points, according to Tradeweb.

(Reporting by Richard Leong; Editing by Steve Orlofsky)