* Canada exports up by 1.0 pct, imports down by 1.2 pct
* Imports drop to 15-month low, volumes also down
* Figures suggest growth will stay sluggish: economists
OTTAWA, Dec 11 (Reuters) - Canada's trade deficit came in much smaller than forecast in October as imports fell to a 15-month low, a sign the economy is still struggling to cope with weak foreign markets and other challenges.
Statistics Canada said on Tuesday that the deficit fell to C$169 million ($171 million) from a revised C$1.01 billion in September. Market operators had expected a C$1.20 billion shortfall.
Imports dropped by 1.2 percent to C$38.28 billion, the lowest level since the C$37.58 billion recorded in July 2011 and 5.7 percent under the record high of C$40.60 billion in June 2012. Most sectors posted declines and volumes decreased by 1.8 percent.
"The key in this report is what it says about broadly based import weakness as a reflection of the very soft Canadian economy over the second half of 2012," Toronto-Dominion Bank economist Derek Burleton said in a note to clients.
Canada's economy grew at a tepid 0.6 percent pace, annualized, in the third quarter, in large part because of weaker exports. Canadian exporters are struggling to cope with the European crisis, uncertainty over the U.S. "fiscal cliff" and a strong Canadian dollar.
Exports grew by 1.0 percent on higher shipments of farm, fishing and intermediate food products as well as crop products such as soybeans. Volumes were up by 0.3 percent.
"While trade looks as though it could add to Canadian GDP growth in the fourth quarter, the underlying story is less positive," said Benjamin Reitzes, senior economist at BMO Capital markets.
"Export growth remains weak, with the drop in imports providing all the boost. With the U.S. facing uncertainty driven by the fiscal cliff, Canadian exports will likely remain challenged into next year," he said in a note to clients.
Exports to the United States, which took 71.8 percent of all Canadian exports in October, dropped by 0.2 percent while imports grew by 1.6 percent. As a result, Canada's surplus with the United States dropped to C$2.77 billion from C$3.21 billion in September.
Peter Hall, chief economist at Export Development Canada, noted exports to the United States might have been higher had it not been for Hurricane Sandy, which hit the eastern U.S. seaboard in late October.
Year-on-year, he noted, exports in the crucial auto sector were up by 8.0 percent.
"I don't want to make it look brighter than it actually is ... (but) in light of the U.S. weakness I think these numbers are good," he told Reuters.
Markets focused on the smaller deficit -- the best performance since the C$378 million surplus in March -- and the Canadian dollar touched a more than 7-week high against its U.S. counterpart.
The currency hit C$0.9858 against the greenback, or $1.0144, after trading around C$0.9863, or $1.0139, heading into the report. It was the Canadian dollar's strongest level since Oct. 19.