(Updates with comment after rate decision)

By Ka Yan Ng

TORONTO (Reuters) - The Canadian dollar jumpedagainst the U.S. currency Wednesday after the Bank of Canadaraised interest rates and left the door open for further ratehikes, while bonds turned sharply lower.

The Bank of Canada raised its benchmark interest rate by 25basis points for a third time this year, bringing the rate to 1percent, but it cautioned that a weak U.S. economy would hamperCanada's recovery.

Still, market analysts found the statement to be morebalanced than expected, lighting a fire under the currency andsparking a selloff in bonds.

"The view was that there was going to be more of a signalof a pause (in rate hikes) at the next fixed announcement dateand the market didn't get it," said Derek Burleton, deputychief economist at TD Bank Financial.

At 9:35 a.m. (1335 GMT), the Canadian dollar wasat C$1.0402 to the U.S. dollar, or 96.14 U.S. cents, more thanthree-quarters of a cent higher than its level just before thepolicy announcement. It was also up from Tuesday's close ofC$1.0480 to the U.S. dollar, or 95.42 U.S. cents.

The two-year Canada bond dropped 18 Canadiancents to yield 1.362 percent, while the 10-year bond fell 72 Canadian cents to yield 3.012 percent.

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 was stiffly in favor ofno change in rates.

According to a Reuters calculation on yields on overnightindex swaps, the markets saw about an 82 percent probability ofthe bank leaving rates unchanged at its next policyannouncement date in October.

That is in line with a recent Reuters poll of globalstrategists and Canada's 12 primary dealers that showed mostsaw the bank leaving interest rates steady for the rest of theyear.

"As it stands right now, our official call was for the bankto remain on hold for the next few meetings, but that'sobviously something we have to review in light of the statementand as economic figures roll in in the weeks ahead, but that'sour official call for now," said Doug Porter, deputy chiefeconomist at BMO Capital Markets.

Investors were also eyeing the U.S. Federal Reserve'srelease of its Beige Book, due later in the day. This economicevidence gathered from the central bank's 12 regional bankswill provide insight into the state of the U.S. economy, aswell as U.S. retail sales data. (Additional reporting by Claire Sibonney, Jennifer Kwan, andSolarina Ho; editing by Peter Galloway)