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* TSX down 178.43 points, or 1.64 percent, at 10,689.78
* Financials, down 2.9 pct, lead TSX lower
* Market shrugs off prospect of Canadian election (Adds official closing figures, details, quotes)
By Jennifer Kwan
TORONTO, Sept 1 (Reuters) - Toronto's main stock index fell on Tuesday as investors took profits in financial stocks after strong earnings last week and as the market grew cautious about a rally that has driven the index up about 40 percent since early March.
Heavyweight decliners included Royal Bank of Canada (RY.TO), down 1.7 percent at C$55.52, and Bank of Nova Scotia (BNS.TO), which dropped 4.2 percent to C$43.92. Insurer Manulife Financial (MFC.TO) fell 3.7 percent to C$21.70.
The index's financial group as a whole .SPTTFS dropped 2.9 percent. It is up 34 percent so far this year.
"There are likely some investors out there that are questioning near-term valuations because the stocks are pricing in heavy expectations going forward," said Gareth Watson, Canadian equity advisor at ScotiaMcLeod.
"I wouldn't be surprised that you're just seeing some profit-taking from last week's strong performance."
The S&P/TSX composite index .GSPTSE was off 178.43 points, or 1.64 percent, at 10,689.78, with nine of its 10 main groups lower.
The index's big energy sector dropped 1.5 percent as oil fell to $68.05 a barrel as economic worries sent investors to safer havens [ID:nL1558697], while the materials group sagged 0.73 percent.
The one bright sector on the index was information technology, up 0.65 percent as Research In Motion RIM.TORIMM.O rose 1.1 percent to C$81.21 after Credit Suisse raised its rating on the BlackBerry maker's stock to "outperform".
The market largely shrugged off news that the official opposition Liberal Party said it will try to bring down the minority Conservative government of Prime Minister Stephen Harper. [ID:nN01496127]
Watson said the impact of the prospect of an election is "likely limited" because the driving factors of the index tend to be energy and materials stocks, which are influenced by global commodities markets. He said if there is any impact, it would likely be in the financial sector.
"They are economically sensitive stocks and different political platforms will obviously develop into different policies which could impact various companies in Canada, but likely not to the degree that you're going to see massive material change in the stock market at this time," he said.
But any political uncertainty could affect an already shaky market, said Elvis Picardo, analyst and strategist at Global Securities in Vancouver.
"At times like this when sentiment is already shaky it's another sort of thing that investors have to worry about, another excuse to take profits off the table," he said.
Analysts have noted investors pausing after a market rally that has seen the Toronto index race up some 40 percent from lows touched in March.
"The move today seems to be largely driven by sentiment more than anything else," Picardo said. "Investors are turning increasinlgy more cautious as we head into what's historically been the most volatile periods of the year for markets."
The blue chip S&P/TSX 60 index .TSE60 closed 10.57 points, or 1.62 percent, lower at 642.21.
$1=$1.10 Canadian Reporting by Jennifer Kwan; editing by Peter Galloway