UPDATE 1-Bank of Canada hikes rates, outlook cloudy

* First in G7 to start raising rates

* Further hikes depend on domestic, global developments (Adds details)

By Louise Egan

OTTAWA, June 1 (Reuters) - The Bank of Canada raised its key interest rate on Tuesday from emergency low levels, but said the European debt crisis made its next move highly unpredictable.

The rate hike, to 0.5 percent from 0.25 percent, made Canada the first of the G7 major industrialized countries to begin hiking interest rates after the global financial crisis.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the central bank said in a statement.

The bank said economic activity was broadly in line with its expectations after two quarters of robust domestic growth, and inflation was also matching expectations.

It said the debt crisis in Greece and some other European countries has so far had only a limited impact on Canada through lower commodity prices and tighter financing conditions. But some countries will now have to cut spending quickly and that, combined with debt reduction by banks and households, could slow global growth.

The bank said its 0.5 percent interest rate was still highly stimulative and would help it achieve its 2 percent inflation target amid considerable slack in the economy, strong domestic spending and an uneven global recovery.

Markets had expected the rate hike. In a Reuters poll of 40 analysts, 32 forecast a quarter-point rate hike and that view was unanimous among Canada's 12 primary securities dealers.

The Canadian dollar CAD=D4 eased after the news, sliding to around C$1.0556 to the U.S. dollar, or 94.70 U.S. cents, from C$1.0498, or 95.26 earlier in the day.

Canada's economy fell into mild recession last year, but its banks emerged unscathed from the credit crisis and jobless rates did not soar as high as in the United States.

Consumer spending and hot housing market have fueled a faster-than-expected recovery since then. The economy grew at a surprising 6.1 percent annual clip in the first quarter, and by 4.9 percent in the fourth quarter of 2009.

But the bank suggested the Canadian recovery could be at risk from developments beyond its borders.

"Recent tensions in Europe are likely to result in higher borrowing costs and more rapid tightening of fiscal policy in some countries - an important downside risk identified in the April Monetary Policy Report," it said. (Reporting by Louise Egan; editing by Janet Guttsman)