By Leah Schnurr

OTTAWA (Reuters) - Canada's economy suffered its biggest one-month contraction in May since March 2009 as wildfires in northern Alberta caused a sharp drop in oil extraction, reinforcing expectations that the economy shrank in the second quarter.

Monthly gross domestic product fell 0.6 percent in May, data from Statistics Canada showed on Friday, exceeding economists' expectations for a decline of 0.4 percent.

The wildfires that started in May around the Fort McMurray area in Alberta disrupted production in the province's oil sands and forced residents from their homes in what is expected to be the country's costliest-ever natural disaster.

As a result, output from the non-conventional oil extraction industry saw a 22 percent drop for the month. Activity in the goods-producing sector overall fell 2.8 percent, including a 2.4 percent decline in manufacturing on a drop in output at petroleum refineries.

Economists and policymakers expect the economy shrank in the second quarter as a whole, due to the wildfires and a snap-back from strong export activity early in the year.

A sharp rebound is anticipated in the third quarter, with the Bank of Canada projecting 3.5 percent annualized growth.

"The issue now is (oil) production should come back in June. By the end of this month, it looks like it's fully recovered, and so we should see a reversal of the weakness," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

"It should contribute to GDP bouncing strongly in the third quarter after a decline in the second."

Economists said that even with Friday's slightly disappointing reading, it was not likely to change the central bank's path. The bank is seen holding rates until late 2017, after cutting twice last year as Canada fell into a brief recession. [CA/POLL]

The Canadian dollar strengthened against the greenback immediately following the data, though investors were also taking in disappointing second-quarter U.S. growth figures. [CAD/]

Overall, there was little evidence that the wildfires significantly affected other sectors of the economy, the government's statistical agency said.

Excluding the decline in non-conventional oil extraction, economic growth edged down just 0.1 percent in May. The services sector held up relatively well with a 0.3 percent gain.

Separate data on Friday showed producer prices rose in 0.6 percent June, slightly more than economists' had expected, as the cost of energy and petroleum products increased for a fourth month in a row.

(Additional reporting by Fergal Smith in Toronto; Editing by Jeffrey Hodgson)