(Adds details, analyst comment)
By Jonathan Spicer
TORONTO, Jan 24 (Reuters) - The main index of the Toronto Stock Exchange climbed sharply on Thursday morning, lifted by higher commodity prices, the prospect of more interest rate cuts, and strong profits at Potash Corp of Saskatchewan (POT.TO).
The S&P/TSX composite index .GSPTSE was off early highs by late morning, but still up 210.52 points, or 1.7 percent, at 12,867.92. Nine of the index's 10 main sectors were up, with materials stocks leading the charge.
In its Monetary Policy Report Update on Thursday morning, the Bank of Canada strongly hinted more interest rate cuts were on the horizon, boosting market sentiment.
Investors also cheered reports that New York state regulators were meeting battered U.S. bond insurers to hammer out a plan that could ease the credit crisis.
Recently-depressed commodity prices benefited as worries over a U.S. recession eased, which in turn lifted the resource-heavy TSX.
Meanwhile, shares of Potash Corp soared more than 5 percent after the world's biggest fertilizer producer reported a doubling of fourth-quarter profit, beating expectations. For details, see: [nL24902402]
Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier, said much of the index's rise could be attributed to a short-covering rally, where investors buy stocks to replace those that were borrowed earlier for a short sale.
"There were so many shorts out there that any whiff of good news -- such as the Fed lowering rates and capital injections for the bond insurers -- encourages (short-sellers) to cover," he said.
The materials sector advanced 3.8 percent, with Potash Corp up C$6.52 at C$128.40.
The prices of gold and oil also rose, benefiting from a weaker U.S. dollar.
The TSX energy sector, second in weight to the financial sector, jumped 1.7 percent as U.S. crude oil futures hovered near $87.25 a barrel, still higher on the day even though data showed U.S. crude oil and gasoline supplies rose last week.
Natural gas futures, another key gauge for Canadian energy producers, were also higher.
Financial stocks led a late-day rise on Wednesday but were flat on Thursday morning. Toronto-Dominion (TD.TO), Canada's second-biggest bank, was down 94 Canadian cents at C$67.30.
"I still think it's a pretty tentative rally that could turn quickly because I don't think investors have enough confidence to come in," Nakamoto said.
$1=$1.01 Canadian Reporting by Jonathan Spicer; Editing by Peter Galloway