* Canadian dollar hits 92.73 U.S. cents, then pares gains

* First-quarter GDP data treated as benign

* Bond prices lower on sharp stock market rise
(Updates to close)

By Ka Yan Ng

TORONTO, June 1 (Reuters) - The Canadian dollar eked out a
small gain versus the U.S. currency on Monday, but was unable
to hold on to the near eight-month high it hit overnight as
market players took a breather after the currency's recent
surge.

The Canadian dollar, boosted by risk appetite, rallied
overnight to hit C$1.0784 to the U.S. dollar, or 92.73 U.S.
cents, its highest level since Oct. 3, extending the climb it
embarked on after falling to a four-year low in early March.

It rose 9.3 percent rise in May, its biggest monthly gain
since at least October 1950, according to Bank of
Canada data that dates back to 1950.

But as Monday's session wore on, the Canadian dollar
drifted lower, tracking the euro. [ID:nN01264640]

"It comes down to the fact that the market is extremely
short U.S. dollars right now and it's a pretty crowded dance
floor of people who are long Canada," said Jack Spitz, managing
director of foreign exchange at National Bank Financial.

"So a paring back of risk in conjunction with the GM news
today, the Bank of Canada (interest-rate announcement) on
Thursday and all the payroll numbers...it's no big surprise to
see the market take back some of those positions that it's been
so eager to put on over the last few weeks."

The Canadian dollar finished at C$1.0910 to the U.S.
dollar, or 91.66 U.S. cents, up from C$1.0917 to the U.S.
dollar, or 91.60 U.S. cents, at Friday's close.

The Canadian dollar's rise from its March low has been
credited to a combination of higher prices for key Canadian
commodities, some upbeat economic data and falling demand for
the U.S. dollar.

The market treated as benign news on Monday that Canada's
economy contracted 5.4 percent in the first quarter, the
fastest pace of decline since 1991, pushing the country into
its sharpest two-quarter downturn on record. [ID:nN01454666]

Analysts had expected a 6.6 percent drop.

"It's hard to put a positive spin on such a deep drop in
GDP, but the fact is that it wasn't as bad as expected and
there are lots of signs to suggest that things have improved
immeasurably since the first quarter, so I think overall, this
is not bad news," said Doug Porter, deputy chief economist at
BMO Capital Markets.

BONDS LOWER

Canadian bond prices were lower across the curve as stock
markets rose sharply on optimism over economic recovery. Stocks
and bonds typically trade inversely to one another depending on
risk appetite.

Market watchers said some of the drop may have been related
to a massive amount of June 1 coupon payments hitting the
market on Monday, which may be reinvested further out in the
curve.

"Canada's bond market is in the midst of a very important
day of its own, the June 1 curve extension," said Eric
Lascelles, chief economics and rates strategist at TD
Securities.

Although Canada's first-quarter GDP data came in better
than expected, market players were confident the Bank of Canada
was unlikely to stray from its recent pledge that it will keep
its benchmark interest rate unchanged at 0.25 percent for at
least the rest of the year. [ID:nN01248280]

The benchmark two-year government bond fell 8 Canadian
cents to C$99.96 to yield 1.270 percent, while the 10-year bond
lost 35 Canadian cents to C$102.40 to yield 3.464 percent.

The 30-year bond eased 20 Canadian cents to C$115.90 to
yield 4.046 percent.
(Additional reporting by Scott Anderson; editing by Peter
Galloway)