By Ka Yan Ng

TORONTO (Reuters) - The Canadian dollar finishednearly a penny higher against the U.S. currency Wednesdayafter the Bank of Canada raised interest rates and kept openthe possibility of further near-term rate hikes, while bondsfell sharply.

The Bank of Canada raised its key interest rate by 25 basispoints for a third straight time this year, bringing the rateto 1 percent, but it cautioned that a weak U.S. economy wouldhamper Canada's recovery.

Still, market analysts found the statement to be morebalanced than expected, which lit a fire under the Canadiancurrency and sparked a selloff in bonds.

"The statement didn't shut any doors. They continue tomonitor the data in these highly uncertain times. The languagenoted some high uncertainty and they also noted the extremelyaccommodative monetary conditions," said Sacha Tihanyi,currency strategist at Scotia Capital.

"It just goes to show that it's a very uncertainenvironment. The pace of rate increases is not obvious."

The Canadian dollar finished at C$1.0374 to theU.S. dollar, or 96.40 U.S. cents, up from Tuesday's close ofC$1.0480 to the U.S. dollar, or 95.42 U.S. cents.

The currency had jumped as high as 96.66 U.S. cents, butpared gains after the U.S. Federal Reserve's Beige Book reportshowed growth eased in the six weeks through the end of August,suggesting the recovery was faltering along the East Coast andin the Midwest.

The two-year Canada bond dropped 29 Canadiancents to yield 1.418 percent, while the 10-year bond shed C$1.07 to yield 3.050 percent. Canadian bondsunderperformed their U.S. counterparts across the curve.

The rate decision was one of the closer calls for thecentral bank in some time, and while market watchers said thebank's statement did not shut down the possibility of more ratehikes in the near term, market pricing Wednesday favored nochange in rates.

According to a Reuters calculation on yields on overnightindex swaps, the probability of the bank leaving ratesunchanged at its next policy announcement date in October fadedto about 68 percent at the end of Wednesday's session fromaround 90 percent, right after the rate decision.

The pricing is in line with a Reuters poll of Canada's 12primary dealers after the rate announcement, which showed moststicking to previous forecasts that the central bank will leaveinterest rates steady for the rest of the year after aSeptember hike. Some of the respondents said their forecastswere under review.

"Granted, there's a possibility of a hike still over thenext several decisions but I don't see any conviction from thebank quite yet," said Eric Lascelles, chief macro strategist atTD Securities.

He noted that Bank of Canada Governor Mark Carney hasseveral speaking engagements in the next month and that he willclosely parse the bank chief's comments as well as monitor theincoming data.

This Friday, Carney will be participating in the SpruceMeadows Changing Fortunes Round Table in Alberta. His commentswill follow Canada's August figures for employment. They areexpected to show the economy added 30,000 jobs in the month.

The currency held gains after data showed purchasingactivity in the Canadian economy jumped much more than expectedin August. (Editing by Peter Galloway)