UPDATE 2-Canada economy slides in May as energy, cars hit

* Recession deepens with 10th straight monthly contraction

* Energy, manufacturing hardest hit in May

* Q2 GDP seen declining at least 3 percent

* Bank of Canada likely to hold rates through Q2 2010 (Adds analysts' comments, background)

By Louise Egan

OTTAWA, July 31 (Reuters) - Canada's economy contracted for the 10th straight month in May as weak global demand pummeled the energy and manufacturing sectors, deepening the country's worst recession since the early 1990s.

Gross domestic product by industry fell 0.5 percent in May from April, Statistics Canada said on Friday, worse than the market expectation of a 0.3 percent decline. GDP fell 3.5 percent from May 2008.

The May downturn puts the economy on track for a second-quarter decline of at least 3 percent, economists said. That would follow declines of 5.4 percent and 3.7 percent in the previous two quarters.

The Bank of Canada and most private-sector analysts are predicting a return to growth in the July-September quarter.

"So for now, we are forced to hold our noses for another month and await the flowers that are expected to spring in the second half of the year, beginning with the month of July," said Stewart Hall, markets strategist at HSBC Canada.

Still, the economic hole now looks deeper than expected and may take longer to crawl out of. That means the Bank of Canada is likely to follow through on its pledge to keep its benchmark interest rate at its current rock-bottom level until the end of June next year, conditional on inflation not spinning out of control.

"The bank's assessment that the risks to the inflation outlook are biased 'slightly to the downside' means that, until the economy's recovery is well entrenched, no changes to the policy rate are likely," said Dawn Desjardins, assistant chief economist at RBC Economics Research.

Goods-producing industries, which have contributed most to the downturn in the last four months, fell 1.6 percent in May. They were dragged down by weak energy, mining, motor vehicle and parts production as well as by a construction industry decline.

Output in the services sector was unchanged. The biggest advances were made by real estate agents and brokers, helped by a rebound in the home resale market to levels of a year earlier, and retail trade. Weak wholesale activity partly offset those gains. (Reporting by Louise Egan; editing by Peter Galloway)