* TSX up 35.32 points, or 0.3 percent, at 12,067.90 * Banks lead rise ahead of end-August earnings period By Alastair Sharp TORONTO, Aug 17 (Reuters) - Canada's main stock index rose on Friday on modest gains in heavyweight banks, miners and energy companies, buoyed by positive U.S. data and easing fears about Europe's debt crisis. But investors questioned how much higher the Canadian index could go as it tests levels above 12,000 points last seen in early May. "The index is getting close to being what I would consider overbought," said Julie Brough, vice president at Morgan Meighen & Associates. "I question whether this is the beginning of a prolonged upward trend or more of a relief rally." Canadian inflation came in tamer than forecast in July, raising expectations that the Bank of Canada will keep interest rates at near-record lows well into next year. Meanwhile, a gauge of future U.S. economic activity improved in July, while U.S. consumer sentiment improved in early August. An improving U.S. economic outlook has positive implications for Canadian equities, given the major trade conducted between the two countries. Comments from Germany's Angela Merkel supporting the European Central Bank's crisis-fighting strategy also helped sentiment. Banks -- which line up to report quarterly earnings in late August -- were the biggest positive influence, with Royal Bank of Canada up 0.6 percent to C$53.75 and Toronto Dominion Bank rising 0.8 percent to C$81.09. By 10:20 am (1420 GMT), the Toronto Stock Exchange's S&P/TSX composite index was up 35.32 points, or 0.3 percent, at 12,067.90. Oil and gas companies also added to the gains, with Suncor Energy Inc leading the way with a 0.8 percent rise to C$32.34.