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* TSX up 57.31 points, or 0.48 percent, at 12,089.89 * Diminishing fear of Europe helps risk appetite * Banks lead rise ahead of end-August earnings period By Alastair Sharp TORONTO, Aug 17 (Reuters) - Canada's main stock index closed higher o n Friday, capping a second straight week of gains a s banks and energy stocks pushed higher and political backing for European central bank action lent support. The rally suggested that steps toward a resolution of Europe's debt crisis were leading to renewed risk appetite that could favor Canada, with its abundance of resource-related listings. "If you remove the perception of event risk in Europe, money will come back in," said Michael Gayed, the ch ief i n vestment st r ategist at Pension Partners L LC in New York. It was banks -- which are duet to report quarterly earnings in late August -- that had the biggest positive influence o n the Canadian index, with Royal Bank of Canada rising 1.0 percent to C$53.99 and Toronto Dominion Bank up 0.9 percent to C$81.24. German Chancellor Angela Merkel voiced support for ECB President Mario Draghi's crisis-fighting strategy on Thursday an d urged her European partners to move swiftly towards a closer integration of fiscal policies, saying time was running short. [ID: nL2E8JG8KL] "You have this strange global cognitive dissonance happening, where everyone has been talking about the end of the world because of Europe, but prices aren't reflecting that," Gayed said. The Toronto Stock Exchange's S&P/TSX composite index unofficially closed up 5 7.31 points, or 0.48 percent, at 12,089.89. I t marked the second straight week in which the index added more than 1.6 percent. Still, other 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." Oil and gas companies also added to the gains, with Suncor Energy Inc leading the way with a 1 . 2 percent rise to C$32.43 . 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. Canadian National Railway Co also helped push the index higher, adding 1.5 percent to C$91.54.