* Energy sector down 8.3 pct, financials drop 4.5 pct
* TSX comes within 24 points of 5-1/2 year low
* AIG's big loss rattles financial shares (Adds comments and details)
By Frank Pingue
TORONTO, March 2 (Reuters) - Toronto's main stock index joined a global equity selloff on Monday, falling more than 5 percent for its biggest one-day drop in three months, hit by weaker oil prices and data that showed the Canadian economy shrank sharply in the fourth quarter.
Heavily weighted financial shares were a major drag on the index as news that U.S. insurer AIG (AIG.N) posted a record quarterly loss fueled fears that the global financial crisis is worsening.
That sentiment dragged shares of insurer Manulife Financial (MFC.TO) down 10 percent to C$11.58, while Bank of Nova Scotia (BNS.TO) tumbled 5.85 percent to C$27.03. The Toronto Stock Exchange's financial index ended down 4.5 percent.
"The market is down over worries about global growth as well as continued worries about what's happening with financial services in the U.S. and how much worse it will get, which is affecting financials everywhere," said Kate Warne, Canadian market strategist at Edward Jones in St. Louis, Missouri.
"But it's clearly more of a reaction than I expected since I thought people were pretty pessimistic already."
Nagging concerns that a deteriorating world economy could cut further into fuel consumption shook oil prices and shares of energy companies. Suncor Energy (SU.TO) fell 10 percent to C$23.75, and EnCana Corp (ECA.TO) dropped 6 percent to C$47.07. The energy sector ended down 8.31 percent.
The S&P/TSX composite index .GSPTSE closed the session down 435.51 points, or 5.36 percent, at 7,687.51, which more than erased all of last week's 2 percent gain. All 10 of the TSX's sectors ended the session deeply in lower territory.
At one point, the composite index fell as low as 7,589.66, which left it less than 24 points from its lowest level since October 2003.
Data released before the index opened showed Canada's gross domestic product contracted in the fourth quarter of 2008 more than in any quarter since the start of 1991.
That figure was slightly better than expectations but still supported expectations for the Bank of Canada to cut its key interest rate on Tuesday below the current 1.00 percent.
The data was another in a long line of weak Canadian economic reports that have arrived in recent weeks, including jobs, consumer spending, business investment and exports.
And while many experts agree that a massive selloff can sometimes mark the end of a downturn in equities, few were willing to call Monday's skid the final installment of the recent equity turmoil.
"You need to go off in one big decline and then form some sort of a base," said Elvis Picardo, analyst and strategist at Global Securities in Vancouver. "But that doesn't really seem to be happening and over the past few months and we just keep trending lower and lower."
Equities overseas tumbled after insurer AIG posted its $61.7 billion quarterly loss. The selloff carried over and weighed on North American equities.
$1=$1.29 Canadian Editing by Peter Galloway