* Financials lead TSX higher on U.S. bank action hopes
* Seven banks and insurers are top advancers
* Materials group lower on falling gold price
* France's Total launches C$617 mln bid for UTS Energy (Updates to midmorning, adds details)
By Ka Yan Ng
TORONTO, Jan 28 (Reuters) - Toronto's main stock index rose 1.6 percent on Wednesday morning, led higher by the heavily weighted financial sector on hopes that Canada's C$40 billion ($33 billion) stimulus package and further U.S. government action would promote economic stability.
There was optimism that the new U.S. administration was moving quickly to stabilize the ailing banking sector, helping to boost U.S. stocks, and as lawmakers prepared to vote on a stimulus package to help the recession-hit economy.
This sentiment spilled over to Toronto's financials group, which rose 5.5 percent.
"We'll see if that's enough to sustain this rally," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.
"Anything you can do to take these assets off the bank's balance sheet would be helpful. Then you have to get the banks to start lending, to get the economy moving. It's one step."
Canada's five biggest banks and two largest insurers were the top key advancers. Royal Bank of Canada (RY.TO) was up 4.8 percent at C$32.14, while Toronto Dominion Bank (TD.TO) gained 6.3 percent to C$42.24. Bank of Nova Scotia (BNS.TO), Manulife (MFC.TO), and Bank of Montreal (BMO.TO) were also big gainers.
The financials were also supported by plans outlined in Tuesday's federal budget. The government said it would commit C$50 billion more to a program that buys insured mortgages and would also give itself the authority to inject capital into banks and financial companies that need support. [ID:nN27430329]
"No one is saying that the Canadian banks are going to go the way of the U.S. banks, but it's better to have something in place in case it happens," said Nakamoto.
At 10:55 a.m. (1555 GMT), the S&P/TSX composite index .GSPTSE was up 139.33 points, or 1.6 percent, at 8,8898.96. Five of the TSX's main 10 groups were higher.
The materials sector was the biggest decliner, down fell 2.8 percent, partly on weakness in the price of gold.
Meanwhile, Sherritt International (S.TO) said its Ambatovy joint-venture nickel project in Madagascar needs to be restructured as it copes with falling nickel prices and mounting costs. Sherritt was up 4.9 percent at C$3, gaining after two sessions of sharp declines. [ID:nN28352215]
The oil group rose 3.5 percent after the first takeover attempt was launched in the oil sands sector since slumping oil prices undercut multibillion-dollar expansion plans.
Shares in oil sands developer UTS Energy Corp UTS.TO doubled early on Wednesday, after French oil major Total SA (TOTF.PA) launched an unsolicited C$617 million bid for the company. UTS, the most heavily traded stock, rose 75 Canadian cents to C$1.58 as analysts said a higher offer may come. [ID:nN28514262] (Reporting by Ka Yan Ng; editing by Rob Wilson)