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* Three-day TSX rally halted
* Seven of TSX's 10 groups up, but energy drops 2.1 pct
* U.S. bank earnings may set direction for rest of week (Adds comment, details)
By Ka Yan Ng
TORONTO, April 14 (Reuters) - Toronto's main stock index fell on Tuesday after hitting a three-month high earlier in the day as lower oil prices pulled down its heavily weighted energy sector.
Seven of the TSX's 10 subindexes posted small advances, but it was not enough to offset the 2.1 percent drag from the energy group. Industrials and telecoms both fell more than 1 percent.
Oil is a key Canadian export and its price often dictates direction for the TSX index's energy component. It slipped below $50 a barrel on Tuesday on demand and inventory forecasts. [ID:nSP458479]
The S&P/TSX composite index .GSPTSE fell 54 points, or 0.58 percent, to finish at 9,231.62 after three straight sessions of higher closes. The index hit 9,330.61 during the day, its highest level since Jan. 7.
Steve Ibel, an institutional equities trader at Beacon Securities, in Halifax, Nova Scotia, described the recent action as "a rally in a bear market but it's also a bottoming process."
He expects there will be "one or two more shoes to drop" before a market recovery emerges in the summer.
The slide in the TSX did not spur much concern among market watchers as the index entered the session up 24 percent from the multi-year low hit in early March.
"We've just got a little profit-taking because Canada had been on a nice run for the past few days and weeks," said Bruce Latimer, trader at Dundee Securities. "But the earnings in the U.S. are the focus here, that's driving New York, and Canada is just following along."
U.S. equities also dropped, pulled down by data that showed an unexpected drop in U.S. retail sales as the market awaited the onslaught of quarterly corporate earnings that will be released in the coming weeks. [ID:nN14446934]
The heavily weighted financials index offset some of the TSX's weakness, up 0.15 percent after news that U.S. investment bank Goldman Sachs (GS.N) reported a profit late on Monday that was higher than expected. [ID:nN13387020]
The sector rallied higher earlier in the day, pulling the TSX briefly into positive territory. But U.S. financials turned lower after Goldman Sachs said it would raise $5 billion by issuing common stock, taking the wind out of the Canadian sector's gains.
Bank of Montreal (BMO.TO) was the top mover on upside, up 2.7 percent at C$38.03.
Earnings reports from key U.S. banks such as JP Morgan will likely set the direction for markets for the balance of the week, with investors hoping the reports will show the fragile U.S. financial sector has stabilized.
"The most important thing you really want to watch out for on both sides of the border is a couple of U.S. financials reporting," Ibel said. "That, in large part, will dictate how the markets round out the week."
$1=$1.21 Canadian Additional reporting by Frank Pingue; editing by Peter Galloway