UPDATE 1-Bank of Canada says strong C$ offsetting good news

(Adds details, currency reaction)

OTTAWA Oct 20 (Reuters) - The Bank of Canada reiterated its conditional intention to keep its overnight interest rate at 0.25 percent through mid-2010, saying the strong Canadian dollar would "more than fully offset" favorable developments since July.

Far from giving any suggestion of an early exit from its extended low-rate strategy, it projected a three-month delay -- to the third quarter of 2011 -- in the closing of the output gap and the return of inflation to its 2 percent target.

It made the startling projections as it announced it was keeping its target for the overnight rate at 0.25 percent, where it has been since April. Some analysts had been looking for hints of rates rising more quickly than mid-2010.

Resumption of growth in Canada has been supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices and stronger business and consumer confidence, it said.

"However, heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July," it said in its statement.

Canadian growth in the second half of this year will be slightly higher than previously projected but growth will average slightly lower over the rest of the projection period.

The central bank revised its projection for this year to -2.3 pct from the -2.4 percent it expected in July; next year is seen, as before, at +3.0 percent; and 2011 is downgraded slightly to +3.3 percent from +3.5 percent.

Global economic and financial conditions have been somewhat better than forecast in July but significant fragilities remain, it said.

The Canadian dollar CAD= weakened to C$1.0385, or 96.29 U.S. cents, from C$1.0320, or 96.90 U.S. cents, just before the report. (Reporting by Randall Palmer; Editing by James Dalgleish)