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* TSX up 120.42 pts, or 1 pct, to 11,686.57 * Energy, mining issues lead gains * China stimulus hopes boost commodities * Spain banking worries weigh on sentiment By Jon Cook TORONTO, May 29 (Reuters) - Canada's main stock index rose sharply on Tuesday as oil and mining firms were lifted by hopes of further policy stimulus in China, helping markets shrug off concerns over the deterioration of Spain's banking system. Equities markets were boosted after Chinese media reported that the government might pump as much as 2 trillion yuan ($315.28 billion) into the economy this year, although this would be well below 4 trillion yuan ($635 billion) of stimulus it did in the wake of the 2008-09 global financial crisis. The news was a tonic for Canada's struggling materials and energy sectors, which account for about 40 percent of the weighting of the Toronto Stock Exchange's S&P/TSX composite index. Oil and gas firms led the way, up 2 percent, while materials, which includes miners, rose 0.9 percent. "The stock market in general is ridiculously cheap," said Brendan Caldwell, chief executive of Caldwell Investment Management Ltd. "The Canadian market has been underperforming for a while, because the commodities sector has been hammered." The most influential gainers included Teck Resources , up 4.8 percent at C$32.82, First Quantum Minerals , which rose 1.3 percent to C$18.31, Suncor Energy , up 2.5 percent at C$29.63, Cenovus Energy, which climbed 2.9 percent to C$33.33, and Canadian Natural Resources, up 2 percent at C$32.40. At 11 a.m. (1421 GMT), the TSX was up 120.42 points, or 1 percent, to 11,686.57, close to a three-week high. Euro zone debt crisis fears increased after Spanish 10-year borrowing costs neared the 7 percent danger level after the government, struggling to sort out its finances, proposed putting sovereign debt into the struggling lender. Concerns that Spain's financial woes could deepen the euro zone debt crisis led some investors to beef up their Treasuries holdings, whose yields are hovering near historic lows. "At some point the world has to move beyond Europe," said Caldwell. "It's mentally written off Greece. It probably hasn't written off Spain, Italy and Portugal yet." However, good second-quarter earnings results from Bank of Nova Scotia helped the Canadian financial sector temporarily shake off euro zone debt fears, rising 0.8 percent on Tuesday. Scotiabank's shares jumped 2.2 percent to C$51.93 after Canada's No. 3 bank said its second-quarter operating profit rose as international banking and lending profits grew. Canadian railway shares also helped boost gains, a day after settling disruptive labor disputes. Canadian National Railway was up 2.9 percent to C$84.28 a day after the country's largest railway operator said its 210 train dispatchers had ratified a new collective bargaining agreement. Canadian Pacific Railway jumped 1.4 percent to C$76.56 after the Canadian government on Monday said it will force CP's 4,800 striking workers back to work with fast-track legislation aimed at restoring rail service by Thursday.