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TORONTO (Reuters) - Canada's main stock index tumbled as much as 2 percent on Tuesday as bearish U.S. corporate forecasts and a credit downgrade of five Spanish regions sent resource and financial stocks sharply lower and revived distress over the global economy.
Energy stocks, which had been hit hard on Monday, fell 1.97 percent. Suncor Energy, one of the most heavily weighted decliners, dropped 2.16 percent to C$32.66. Canadian Natural Resources fell 3.7 percent to C$29.64.
Financial stocks, led by the Royal Bank of Canada, fell 1.3 percent, in sympathy with U.S. bank stocks.
"The market is very skittish ... fear of what's going on worldwide," said Irwin Michael, portfolio manager at ABC Funds.
"We all know the economy appears to be scratching bottom, and slowly but surely moving up, but people are concerned about earnings per share."
Soft earnings outlooks from major U.S. companies like DuPont, 3M fueled worries over the economic health the United States, Canada's largest trading partner.
Sixty-three percent of the S&P 500 companies that have reported quarterly results so far have missed analysts' expectations for revenue. By contrast, since 1994 an average of 62 percent of companies have exceeded estimates. Over the past four quarters, 55 percent of companies have beaten.
"It's a pretty ugly day. Just about everything that could go wrong is going wrong," said John Kinsey, portfolio manager at Caldwell Securities Ltd.
The Toronto Stock Exchange's S&P/TSX composite index closed down 1.43 percent, or 177.70 points, at 12,225.84. It had fallen as much as 2.12 percent to 12,141.19 earlier in the day.
ABC Funds' Michael said the market was due for some correction.
"I'm not sure where it bottoms, but eventually ... it will work its way up toward year end. We expect the market to close higher than where it is today by year end," he said.
All 10 of the TSX index's 10 main groups were negative, with half down 1 percent or more. Volumes were not hefty, however, as uncertainty kept investors side-lined.
"It doesn't take very much to move a stock up or down," Michael said.
Lower oil prices weighed on energy shares as investors focused on the fragile world economy and its impact on demand for oil, copper and other commodities.
The sector extended losses from Monday after Canada's decision over the weekend to block Malaysian state oil firm Petronas's C$5.17 billion ($5.21 billion) bid for Progress Energy Resources Corp. The surprising outcome raised concerns the government might also veto state-owned Chinese company CNOOC's C$15.1 billion takeover bid for oil producer Nexen Inc.
The Toronto index's resource sectors also tracked bullion and copper prices, which both hit six-week lows.
The index's materials group, home to miners, slid 2.09 percent. Goldcorp Inc was down 2.6 percent at C$42.25.
Weakness in U.S. bank shares has spilled over to Canadian banks, said Kinsey, noting that Canadian bank stocks "were due for a correction. Maybe this is it."
Royal Bank of Canada, which said on Tuesday it agreed to buy the Canadian auto finance and deposit business of Ally Financial for $4.1 billion, dropped 1.83 percent to C$56.94.
Toronto-Dominion Bank was down 1 percent at C$82.09. The bank agreed to buy Target Corp's credit card portfolio.
The financial, energy and materials groups make up roughly 75 percent of the index.
Canadian National Railway was down 0.9 percent, at C$86.29. The rail operator posted a modest increase in quarterly profit on Monday as revenues climbed for all its business segments, and affirmed its full-year forecast despite its caution over the economy.
Tourmaline Oil was one of the few gainers, finishing the session up 2.87 percent at C$32.61. The company, on which one analyst raised the price target, said it will buy privately held oil and gas producer Huron Energy Corp in an all-share deal valued at about C$258 million ($259.7 million) to expand its presence in the Montney shale region in British Columbia.
Editing by Jeffrey Hodgson, Leslie Adler and Dan Grebler