* TSX closes 42.94 points lower at 12,101.98
* Six of index's 10 main groups fall (Updates to close, adds details, quotes)
By Claire Sibonney
TORONTO, Sept 7 (Reuters) - Toronto's main stock index fell on Tuesday alongside a global sell-off of risk-prone assets after fears about the health of the European banking sector came back into focus.
Worries about Europe's banks resurfaced after the Wall Street Journal reported major European lenders understated holdings in potentially risky government debt during "stress tests" designed to shore up confidence. The report hurt stock and commodity prices as it pushed investors toward shelter in safer havens.
Also weighing on the market, Germany's banking association said the country's 10 biggest banks may need 105 billion euros in new capital as regulators revamp rules designed to prevent future crises. [ID:nLDE6850Q9]
Among the Toronto index's biggest decliners, financial shares lost 0.8 percent and energy shares fell 1.1 percent.
Base metals prices, down 2 percent, were also hit hard. Base metals miner Teck Resources TCKb.TO was down 2.4 percent at C$38.74.
"I think we will see (the euro zone) back on the front burner," said Jason Hornett, vice president and fund manager at Bissett Investment Management.
"With countries like Greece and Spain, some of those countries that were concerns earlier in the year probably will come back to the forefront, and we'll see investors reacting to different events going on in those markets."
A surge in gold prices to their highest level since late June limited the index's losses. Gold-mining stocks were up 1.3 percent with Barrick Gold Corp (ABX.TO) 1.8 percent higher at C$47.93.
"I think investors are probably looking for some safe havens in this market just with that negative news on the banking industry," Hornett said.
The S&P/TSX composite index .GSPTSE closed down 42.94 points, or 0.35 percent, at 12,101.89, with six of its 10 main sectors lower.
The index's materials group was up 0.5 percent on the back of the gold rally. So-called "defensive" sectors such as telecoms and utilities also advanced.
Barry Schwartz, vice president and portfolio manager at Baskin Financial Services, said investors were taking a breather after the market's recent rally.
The index gained 2 percent last week to its strongest level since early July, after stronger-than-expected U.S. economic data helped to quell fears of a double-dip recession.
"We've been up eight (sessions) in a row. Valuations now maybe are a little bit stretched," he said.
In individual company news, Potash Corp (POT.TO) gained 1.3 percent to C$156.60 after China's state-owned Sinochem Corp invited Temasek, the Singapore sovereign wealth fund, to join a consortium that may bid for Potash, the world's largest fertilizer supplier. [ID:nN07234946]
Alimentation Couche-Tard (ATDb.TO) fell 2.3 percent to C$23.46 after Casey's General Stores (CASY.O), the U.S. Midwest convenience-store chain fending off a takeover bid from Couche-Tard, said it has received a rival offer. [ID:nN07218734]
Biovail Corp BVF.TO shot up more than 10 percent to C$27.52 after U.S.-based Valeant Pharmaceuticals International (VRX.N), which agreed to be bought by Biovail in June, said the two companies would cut about 25 percent of their combined workforce. [ID:nSGE6860HW]
Onex Corp OCX.TO lost 1.8 percent to C$28.54 after ResCare Inc RSCR.O said it agreed to be acquired by the Canadian private equity firm in a sweetened cash deal that values the U.S. provider of home care to the elderly and disabled at $390 million. [ID:nSGE6860G8]
Shares of Marathon PGM MAR.TO nearly doubled after Stillwater Mining Co SWC.N said it would buy the Canadian exploration company in a cash-and-stock deal worth US$118 million. Marathon, a top net gainer on the TSX, soared 94 percent to C$3.65. [ID:nN07218937]
$1=$1.05 Canadian Editing by Peter Galloway