Canada dollar inches higher vs weakened greenback

* Canadian dollar inches up 0.1 percent vs greenback

* Core inflation rises in August

* Bond prices little changed, focus on U.S. bailout

By John McCrank

TORONTO, Sept 23 (Reuters) - The Canadian dollar was slightly stronger against the U.S. dollar on Tuesday, as uncertainty about the U.S. government's $700 billion rescue plan for its troubled financial sector weighed on the greenback.

Canadian bond prices were little changed, lagging the moves of the bigger U.S. market, as investors waited to see what would develop with the proposed U.S. bailout package.

At 9:40 a.m. (1340 GMT), the Canadian dollar was at C$1.0320 to the U.S. dollar, or 96.90 U.S. cents, up from C$1.0334 to the U.S. dollar, or 96.77 U.S. cents, at Monday's close.

The currency rose 0.1 percent after gaining 1.6 percent against the greenback on Monday.

"The (U.S.) dollar obviously had a disastrous day yesterday... so I'm not surprised to see things settle a little bit this morning," said Steve Butler, senior currency strategist at Scotia Capital.

All eyes were on the U.S. Congress, where U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke were scheduled to answer questions from the Senate Banking committee at 1330 GMT.

In a prepared text, they warned of dire consequences for financial markets if their $700 billion bailout package were delayed. See [ID:nN23313135]

"Everybody sounds very concerned and nervous on whether or not they can get a quick resolution from this rescue package, because the longer it drags on, the more uncertainty there is and the more heartache it's going to cause the markets," said Butler.

The focus on the U.S. bailout plan took attention away from the release of Canadian inflation data for August.

Inflation sped to 3.5 percent on the year from 3.4 percent in July, its highest since March 2003 as energy prices remained sharply above 2007 levels.

Core inflation, which excludes several volatile items like gasoline and is the Bank of Canada's preferred gage of underlying price trends, rose more than expected at 0.3 percent in the month and 1.7 percent year-over-year.

Analysts had expected a monthly rise of 0.1 percent and an annual rate of 1.6 percent, according to median forecasts in a Reuters poll.

Expectations for future Bank of Canada interest rate moves were little changed after the data, with a 51 percent probability of a 25-basis point cut in October, down from a reading of 52 percent on Monday. BOCWATCH

BONDS LITTLE CHANGED

Canadian bond prices were mixed but little changed, lagging the moves of the larger U.S. Treasury market.

"In Canada we have lagged, because beyond just the fact that it's not our problem to the same degree, there is also the issue that core inflation was stronger than expected, preventing us from matching the decline in yields in the U.S.," said Mark Chandler, fixed income strategist at RBC Capital Markets.

The two-year bond was unchanged at C$99.79 to yield 2.849 percent, while the 10-year bond added 2 Canadian cents to C$104.70 to yield 3.662 percent.

The yield spread between the two-year and 10-year bond was 83.9 basis points, up from 84.2 basis points at the previous close.

The 30-year bond fell 5 Canadian cents to C$114.90 for a yield of 4.110 percent. In the United States, the 30-year treasury yielded 4.406 percent.

The three-month when-issued T-bill yielded 2.23 percent, down from 2.27 percent at the previous close. (Reporting by John McCrank; Editing by Scott Anderson)