*TSX index drops 3.54 percent
*Downgrades of energy, fertilizer companies weigh
*Oil drops almost 6 percent to below $40 a barrel (Adds details, comments)
By Wojtek Dabrowski
TORONTO, Dec 22 (Reuters) - Toronto's main stock index shed more than 3.5 percent on Monday as analyst downgrades of energy and fertilizer companies combined with a steep drop in crude prices to drag the resource-heavy market into a broad selloff.
Nine of the 10 main subgroups of the benchmark gave up ground, including the heavily weighted energy and materials groups, which lost 5.95 percent and 5.07 percent, respectively. Financials fell 2.05 percent.
The losses came as U.S. oil dropped nearly 6 percent to below $40 a barrel on signs that the global economic gloom was further slowing fuel demand.
"The panic that we saw in October and November seems to have dissipated to quite an extent," Elvis Picardo, analyst and strategist at Global Securities in Vancouver.
"The focus now is on the hit that companies across the board are taking from this economic slowdown and certainly the commodities and energy are at the forefront of that downside."
Brokerage house Raymond James also cut its share-price targets for a number of large oil companies [nWNAB5090], which helped fuel Monday's drop.
While they pose a challenge for some investors, the declines in oil prices could have a positive impact on consumers, suggested Bruce Latimer, a trader at Dundee Securities.
"You're also seeing gasoline very, very cheap out there," he said. "And that's certainly going to put a few more dollars into consumers' pockets."
Big fertilizer producer Potash Corp (POT.TO) was hit with a downgrade by Goldman Sachs [nBNG407462]. Potash fell 10.5 percent to finish at C$79.33. Last week, Potash cut its profit outlook, putting blame on the weak global economy.
The Toronto Stock Exchange's S&P/TSX composite index .GSPTSE fell 302.47 points, or 3.54 percent, to close at 8,249.53.
Traders' attempts to pull the market up by its bootstraps failed during the session because "there's just no conviction out here," Latimer said.
In the United States, the Dow Jones industrial average .DJI also had a down day, shedding 59.42 points, or 0.69 percent, to end at 8,519.69. The tech-heavy Nasdaq market gave up 2 percent to close at 1,532.35.
$1=$1.22 Canadian Reporting by Wojtek Dabrowski; editing by Peter Galloway