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* TSX touches lowest level in seven weeks
* Financials, down 6.4 pct, lead TSX lower
* Energy sector drops as oil slides below $35 a barrel (Adds details, quote)
TORONTO, Feb 17 (Reuters) - Toronto's main stock index sank more than 3 percent on Tuesday to its lowest level in seven weeks as resource issues slumped on falling oil and base metal prices and as reports fanned worries about a deepening global recession.
The financial services sector led the TSX lower, closing down 6.4 percent, its steepest one-day percentage loss since the beginning of December.
New concerns about the banking sector were sparked by a report from Moody's Investors Service that suggested Eastern Europe's hard-hit economies could drag Western banks into deeper trouble. [ID:nLH575804]
That added to an already gloomy tone in the sector, said Francis Campeau, broker at MF Global Canada, in Montreal, adding that there appear to be "no buying catalysts".
"Going forward, we expect banks' income to decrease," he said. "Forward earnings per share are getting repriced and current dividends are unsustainable."
The S&P/TSX composite index .GSPTSE closed down 299.40 points, or 3.45 percent, at 8,378.70, with nine of its 10 main sectors lower. At one point, the resource-laden index touched its lowest level since Dec. 29. On Monday, the market was closed for a public holiday.
The lone sector in positive territory was the resource-laden materials group, up 0.5 percent, as gold prices got a boost as investors sought refuge from economic gloom.
Grim U.S. housing and factory data helped to dampen the mood in North American equity markets, while market sentiment was also hit after data that showed Japan's economy sank deeper into recession in the fourth quarter. [ID:nN17499156]
The price of oil CLc1 dropped 7 percent to below $35 a barrel on demand concerns [ID:nSIN274982] EnCana Corp ECA.TO fell 5.2 percent to C$51.30, while Suncor Energy (SU.TO) dropped 7 percent to C$22.82. The TSX energy group as a whole was down 5 percent.
A UBS analyst said Air Canada ACa.TO could be forced to file for bankruptcy protection if it does not secure additional financing and succeed in renegotiating covenants in credit card agreements. [ID:BNG392728] Air Canada fell 12.8 percent to C$1.29.
$1=$1.27 Canadian Reporting by Jennifer Kwan; editing by Peter Galloway