The Canadian dollar fell sharply Thursday as unease about European debt pushed investors into the relative safety of the U.S. dollar.

The loonie fell to 93.65 cents US Thursday -- down 2.12 cents from Wednesday's close -- its lowest mark in months.

It appeared the US$1-trillion package for European countries with huge debt problems from the European Union and the International Monetary Fund had not reassured investors as hoped.

Investors are concerned the financial measures attached to the bailout could hamper an economic recovery and that's weighing on the Canadian dollar.

"There's a lot of storms brewing," said Gary Rabbior, president of the Canadian Foundation for Economic Education. "I guess we can hope and pray it doesn't become the perfect storm."

Rising uncertainty is prompting investors to sell off other currencies, such as the loonie, in favour of the greenback, he said on CTV's Power Play.

"Right now, based on the risk, they're going to the American dollar and we're the consequence. Our dollar's going down because of it."

The S&P/TSX composite index fell 259.82 points to 11,405.95, dragged down by commodity and financial stocks.

Meanwhile, the euro managed to gain more than a cent against the loonie, in spite of the debt issues in countries such as Greece, Portugal and Spain.

"Canada is as unaffected as a country can be, but that's not to say it's completely unaffected, because ultimately as we learned in the credit crunch if things were to get really quite bad, you do see every country in the world sucked into this thing," Eric Lascelles, chief strategist at TD Securities told The Canadian Press.

"It's not a statement whatsoever against Canada, against the Canadian economy or against the currency directly."

Some Canadian manufacturers say they're confident the country's economy will stay strong. In fact, they say, the weakened loonie is working to their advantage.

"It really helps with making our product attractive in foreign markets," says Robin Lee, president of Lee Valley Tools.

Analysts say the falling dollar may stall expected interest rates hikes in Canada.

"With kind of scenario in Greece and around the world, it's unlikely the Bank of Canada is going to increase rates," BNN's Pat Bolland told CTV News Channel Thursday.

The Bank of Canada had been expected to begin raising its key rate starting in June.

In a note to clients, Scotia Capital currency strategist Camilla Sutton said "we think the market is still highly sensitive to the Bank of Canada decision on June 1" making it less likely they would raise the rock-bottom 0.25 per cent rate at that time.

Patricia Croft, chief economist of RBC Global Asset Management, says Canada has its fiscal challenges but is still in the midst of a healthy economic recovery. She said that interest rate hikes are due.

"I think interest rate increases are justified in Canada, whether that happens in June or July, probably doesn't make an awful lot of difference," she told CTV News Channel.

"Canadians should realize that interest rate increase will be moderated by what is happening in the world."

With a report by CTV's Ottawa Bureau Chief Robert Fife