* Potash, Agrium tumble after Merrill Lynch downgrade
* Energy sector falls 8 percent as oil slides to $94
* U.S. Senate approval of bailout fails to lift mood
(Adds details, updates figures)
TORONTO, Oct 2 (Reuters) - The Toronto Stock Exchange's main index sank more than 6 percent on Thursday afternoon to its lowest in two years, dragged down by concern over the outlook for fertilizer producers and a drop in oil and gold prices.
Potash Corp of Saskatchewan (POT.TO) and Agrium Inc (AGU.TO), which had helped power the market during the commodities boom, dropped more than 20 percent after Merrill Lynch downgraded the stocks because uncertainty over earnings for the sector. [ID:nN02254052].
The hefty materials group, which includes fertilizer companies, led the market down, tumbling 13 percent.
The energy sector slid 8 percent as oil retreated to $94 a barrel on persistent concerns over weakening demand in a cooling global economy [ID:nSP360782].
The U.S. Senate's passage of a revised, $700 billion financial rescue plan late Wednesday failed to dispel worries over how evaporating credit is affecting the wider economy.
"The banking system is still having very serious liquidity problems and nobody seems to trust anybody," said Levente Mady, broker at MF Global Canada, in Vancouver.
"It's a spillover into stocks, bonds, commodities, currencies, you name it," he said. "Everything that is a high volatility type play is getting annihilated."
Shortly before 3 p.m., the S&P/TSX composite index .GSPTSE was down 728.05 points, or 6.21 percent, at 10,986.46, dipping below the psychological 11,000-level with all of its 10 main groups lower.
Gold futures dropped more than 4 percent on a firmer U.S. dollar and profit-taking, with Barrick Gold (ABX.TO) down 11 percent at C$11.11.
The financial services sector fell 3.1 percent with Toronto-Dominion Bank (TD.TO) down 2.8 percent at C$60.96.
The fate of the $700 billion rescue plan, aimed at allowing the U.S. Treasury to mop up bad mortgage-related assets from financial institutions, rests with the House of Representatives.
The House, which rejected the bill on Monday, is expected to vote on the bill on Friday. [ID:nSP164112]
"Nobody is 100 percent sure it's going to happen," said Joe Ismail, technical analyst at Maison Placements Canada. "It's purely political right now."
Still, until there is more clarity on the global economic outlook, markets will remain rocky, Ismail said.
Potash Corp fell to C$107.16, while Agrium dropped to C$45.18 after the Merrill Lynch downgrade on the sector in the wake of disappointing earnings from Mosaic Co (MOS.N).
Underscoring the impact of the credit crisis, the Toronto Stock Exchange had no initial public offerings in the third quarter, according to PricewaterhouseCoopers. It marked the first quarter in which activity completely had dried up.
With ongoing market volatility, the IPO climate may not improve until 2009, the consulting firm said. [ID:N02268284] ($1=$1.08 Canadian) (Reporting by Jennifer Kwan; Editing by Frank McGurty)