CANADA STOCKS-TSX rises on telecoms deal hope; inverted yield curve draws caution

* TSX set to end week with gains of over 2%

* Rogers, Shaw to sell Freedom Mobile to Quebecor

* Canadian inflation figures eyed next week

By Johann M Cherian

Aug 12 (Reuters) - Canada's main stock index rose on Friday as the country's two main telecoms firms made headway with their merger deal, but gains were capped on worries over "soft landing" challenges for the economy.

At 10:26 a.m. ET (1426 GMT), the Toronto Stock Exchange's S&P/TSX composite index was up 89.76 points, or 0.45%, at 20,081.64. The index has risen 2.2% for the week, getting a bump from softer-than-expected inflation data in the United States.

Rogers Communications Inc and Shaw Communications Inc finalised an agreement to sell Freedom Mobile to Videotron, a unit of Quebecor Inc, in a C$2.85 billion ($2.23 billion) deal.

The spinoff comes at a time when Canada's antitrust agency has kept the Rogers' C$20 billion acquisition of Shaw on hold since May, citing competition concerns.

Keeping investors on edge, the Canadian 10-year government bond yield curve fell some 50 basis points below the 2-year yield, signaling the Bank of Canada may raise interest rates to a level that triggers a recession.

It is the biggest inversion of Canada's yield curve as per Reuters data going back to 1994, deeper than the U.S. Treasury yield curve inversion. Canada's inflation data is set to be released next week.

"The market is worried that the Bank of Canada will over-tighten interest rates and push the economy into a recession," said Angelo Kourkafas, investment strategist at Edward Jones Investments.

"There are clear signs that growth is slowing because the economy is more interest rate sensitive than the U.S. because of the housing imbalances in the economy."

Despite falling 6% this year, Canadian stocks have fared better than their peers in the developed world. U.S. benchmark index S&P 500 has shed 11% in the same period.

Analysts are saying that the TSX is seen as an inflation hedge, given the cyclical nature of its composition, and are overweight on sectors such as financials, energy and materials. (Reporting by Johann M Cherian in Bengaluru; Editing by Anil D'Silva)