By Leah Schnurr
TORONTO, Jan 30 (Reuters) - The Toronto Stock Exchange's main index ended lower on Wednesday in a volatile session as worries over more trouble in the financial sector undercut a brief rally after another U.S. interest rate cut.
The index had bounced higher immediately after the U.S. Federal Reserve announced a highly anticipated 50-basis-point cut and left the door open to more.
But the Toronto benchmark's rally soon evaporated with stocks falling broadly, led down by the banking sector after a report that bond insurers could be downgraded.
Bond insurers were used by some companies to hedge investments in now-faltering subprime mortgage securities, but markets have become nervous that these insurers now could also fail.
"Probably the most important thing is we still haven't got this monoline insurance companies (problem) solved ... that's the key problem right now I think the market is looking at," said Sal Masionis, stockbroker at Brant Securities.
The S&P/TSX composite index .GSPTSE closed down 48.23 points, or 0.37 percent, at 12,998.20 with seven of its 10 main groups in negative territory.
Financials were down 0.9 percent, stung by Swiss investment bank UBS AG's UBSN.VX announcement of $4 billion in new writedowns. The bank signaled half of that was connected to bond insurers.
In Toronto, Canadian Imperial Bank of Commerce (CM.TO) tumbled C$1.85, or 2.6 percent, to C$68.70. CIBC, Canada's fifth biggest bank, has hedged some of its subprime exposure with troubled U.S. bond insurer ACA Capital Holdings Inc, and other bond insurers.
A commentator on CNBC said he believed the two biggest bond insurers will lose their top credit rating. CNBC later reported on its Web site that "it had learned" of possible downgrades, but did not cite any source.
Also in the banking sector, National Bank of Canada (NA.TO) was down 79 Canadian cents, or 1.6 percent, at C$49.28. The bank said it still expects earnings per share to increase this year but its chief executive acknowledged the uncertainty swirling around global financial markets could make this a tough task.
Potash Corp of Saskatchewan (POT.TO) was the biggest drag on the index, falling C$5.32, or 3.8 percent, to C$135.44, while the materials sector - home to resource shares - was down 0.2 percent.
Consumer discretionary and staples shares were down, with the sectors off 1.3 percent and 1 percent respectively.
Worries over the health of the economy in the United States, Canada's biggest trading partner, also dogged the index even amid the Fed's aggressive attempt to stave off a recession.
Masionis said that the hefty interest rate cut, following last week's surprise cut of 75 basis points, means the Fed is "very concerned about the financial liquidity of the market."
On the upside, Suncor Energy (SU.TO) gained C$2.40, or 2.6 percent, to C$93.50 after it said it will spend C$20.6 billion in an expansion that will make it the biggest producer in Alberta's oil sands.
Elsewhere, shares of Iamgold Corp (IMG.TO) dipped after the company said gold production will be 5 percent lower than last year, while costs are expected to increase. Iamgold finished down 37 Canadian cents, or 3.9 percent, at C$9.10.
Market volume was 391 million shares worth C$7 billion. Advancers outpaced decliners 809 to 748. The blue chip S&P/TSX 60 index .TSE60 closed down 3.40 points, or 0.44 percent, at 762.42.
In New York, stocks were also knocked down by the talk of bond insurer downgrades. The Dow Jones industrial average .DJI was off 37.47 points, or 0.3 percent, to 12,442.83, and the Nasdaq Composite Index .IXIC dipped 9.06 points, or 0.38 percent, to 2,349.00.
$1=$0.99 Canadian Editing by Peter Galloway