UPDATE 1-Bank of Canada raises rates, sees recovery slowing

* BoC raises key rate by 25 bps to 0.75 pct, as expected

* BoC: global recovery proceeding but not self-sustaining

* BoC cuts 2010, 2011 domestic growth view, raises 2012

* BoC says economy to return to full capacity by end-2011

* BoC says inflation is broadly in line with projection (Adds details)

OTTAWA, July 20 (Reuters) - The Bank of Canada raised its key interest rate on Tuesday, as expected, for the second straight month but cautioned that domestic and global recovery will be slower than previously expected in a hint that any further hikes may be gradual.

The bank became the first in the G7 advanced economies last month to raise rates from the emergency lows introduced during the global crisis. It took a second step on Tuesday by lifting borrowing costs by another 25 basis points to 0.75 percent, a move unanimously predicted by Canada's primary securities dealers.

But its hawkish stance on rates contrasted sharply with the dovish language in its accompanying statement. It cut its growth forecast for the Canadian economy this year to 3.5 percent from 3.7 percent and said efforts to tackle the European debt crisis would slow the pace of the global rebound as well.

"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 bank said in its announcement.

In a Reuters poll conducted last week, over half of those surveyed expected the central bank to pause in its rate-tightening cycle at some point later this year.

The bank cut its growth outlook for next year to 2.9 percent from 3.1 percent but raised its 2012 forecast to 2.2 percent from 1.9 percent.

The bank now sees the economy returning to full capacity by the end of 2011, two quarters later than it estimated in its April Monetary Policy Report.

"The bank expects the economic recovery in Canada to be more gradual than it had projected in the April Monetary Policy Report," it said.

"This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada."

The domestic growth is fueled by government and consumer spending and while jobs growth has resumed, the housing market is cooling and business investment has not yet bounced back from its sharp contraction during the recession, the bank said.

However, inflation is behaving as it anticipated and will likely remain near the bank's 2 percent target through the end of 2012.

The global economy is growing but is not yet self-sustaining without the help of fiscal and monetary stimulus, the bank suggested.

A greater focus on debt reduction and austerity around the world could have spillover effects in Canada, it said.

"While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long-term growth, it is expected to slow the global recovery over the projection horizon," it said. (Reporting by Louise Egan, Editing by Chizu Nomiyama)