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(Updated throughout, adds new quotes)
By Scott Anderson
TORONTO, Jan 22 (Reuters) - The Toronto Stock Exchange's main index raced more than 400 points higher on Tuesday morning, erasing almost two-thirds of the steep losses of the previous session, as investors cheered interest rate cuts on both sides of the border.
By late morning, the S&P/TSX composite index .GSPTSE was up 354.39 points, or 2.9 percent, at 12,486.52, after climbing as high as 12,598.85. Near the start of the day it actually dipped to as low as 12,011.68 before rebounding.
The gains came in stark contrast to Monday's plunge of more than 600 points as the Toronto market got caught up in a global equities massacre amid worries about a U.S. recession and its impact on world economies.
But a surprise 75-basis-point interest rate cut by the U.S. Federal Reserve on Tuesday, followed by a 25 basis point cut by the Bank of Canada, provided some comfort to beleaguered investors.
"Clearly this is a relief rebound, following yesterday's selloff. It is responding positively to the fact that both the Bank of Canada and the Federal Reserve cut rates," said Kate Warne, Canadian market strategist at Edward Jones, in St. Louis, Missouri.
"I think people are rethinking if it is all that bad, and they are stepping in to take advantage of the opportunity."
All of the TSX's main groups were higher, with the materials sector leading the rise with a gain of 6.1 percent. Energy shares were up 2.2 percent and financials rose 3.3 percent. Together, these three groups account for almost 75 percent of the index's overall weighting.
The resource-heavy materials sector stormed back on the coattails of strong gold issues as the bullion price rose more than 2 percent to $889.45 an ounce as the U.S. dollar tumbled following the Fed's rate cut.
Other materials issues on the rise included Potash Corp (POT.TO), which gained C$5.83 to C$125.40, and Inmet Mining IMN.TO, which climbed C$1.51 to C$62.52.
Energy shares rose despite a 1.3 percent drop in U.S. crude oil prices. EnCana Corp (ECA.TO) was up 92 Canadian cents at C$62.22 and Nexen Inc NXY.TO added C$1.08 to C$27.43.
But Suncor Energy (SU.TO) was down 22 Canadian cents at C$88.10, despite reporting fourth-quarter earnings that more than doubled as it missed analyst expectations and provided a lighter than expected production forecast.
Financial shares jumped as the Fed's big rate cut provided signs that the the U.S. central bank was looking to ease the credit crunch.
Royal Bank of Canada (RY.TO), the country's biggest bank, gained C$2.58 to C$48.00 and Bank of Nova Scotia (BNS.TO) rose C$2.29 to C$45.99. Insurer Manulife Financial (MFC.TO) added 50 Canadian cents to C$36.16.
$1=$1.02 Canadian Reporting by Scott Anderson; editing by Rob Wilson