(Adds details, analyst's comment)
*TSX hands back most of its early gains
*BCE plunges on court ruling, oil reverses
*Banks rebound from recent slide
By Jonathan Spicer
TORONTO, May 22 (Reuters) - The Toronto Stock Exchange's main index clung to some of its early gains on Thursday morning but activity was volatile as the buyout of BCE (BCE.TO) seemed in jeopardy and oil prices dropped sharply, while financial shares bounced back from a three-session decline.
The heavyweight shares of BCE Inc, Canada's biggest telecoms company, were down more than 13 percent -- the TSX's worst performer by far -- after a court ruling cast doubt on its proposed sale to a buyout group led by Ontario Teachers' Pension Plan. See: [nN22488153]
"Today would be a rebound day except that BCE is dampening that part of the index, and the news on BCE is clearly a surprise," said Kate Warne, Canadian market strategist at Edward Jones in St. Louis, Missouri.
The S&P/TSX composite index .GSPTSE opened lower, promptly rebounded more than 80 points, and then handed back most of those gains. At midmorning, it was up 11.45 points, or 0.1 percent, at 14,801.82.
Seven of the Canadian benchmark's 10 main sectors advanced including a 0.9-percent rise in financials. On the downside, the telecoms group fell 1.1 percent.
Canadian financial institutions may have received a spill-over boost from the United States, where ratings agency Standard & Poor's said American International Group (AIG.N), the world's largest insurer, was no longer under review for a possible downgrade. For details, see: [nN21440471]
Elsewhere, bargain-hunters shopped for Canadian materials shares, which recovered about half of the steep losses from the previous session. The sector was up 0.8 percent, with Potash Corp of Saskatchewan (POT.TO) rising C$5.70 to C$197.70.
The energy sector -- which has been firmly behind the TSX's record run the last couple weeks -- rose early but then tumbled 0.9 percent as oil dropped more than $1 to below $132 a barrel. Crude futures had jumped to a record above $135 in early Thursday trade.
The TSX plunged 1.7 percent on Wednesday, hit hard by profit-taking in a late-day selloff.
$1=$0.98 Canadian Reporting by Jonathan Spicer; Editing by Peter Galloway