* TSX tumbles 224.84 points to 8,596.22
* Auto and bank concerns rattle sentiment
* Weaker oil price also weighs
* Fall erases most of last week's gain (Adds details, comments and official numbers)
By Frank Pingue
TORONTO, March 30 (Reuters) - Toronto's main stock index closed 3 percent lower on Monday and erased much of last week's gains as troubles in the North American auto sector and the European banking industry rattled investor sentiment.
Canadian banks and insurers headlined the index's latest skid as news of bank rescues in Europe unsettled investors who had bid up financial stocks in recent weeks.
Shares of insurer Manulife Financial (MFC.TO), the biggest drag on the overall index, dropped 8.5 percent to close at C$13.72, while Royal Bank of Canada (RY.TO) followed with a drop of 3.2 percent to C$35.80.
The drop in shares of Canadian banks and insurers followed similar falls by financial stocks overseas on news that Spain was forced into its first bank rescue since the global financial crisis began. Britain and Germany also shored up lenders. [nLU302379]
"The bulls got ahead of themselves over the past few weeks where there was a 20 somewhat percent rally without any pullback," said Francis Campeau, broker at MF Global Canada in Montreal.
"And then the GM stories, the bank stories ... just kind of scared a few longs to take some profits."
Another major drag on sentiment was talk of bankruptcy for automakers General Motors (GM.N) and Chrysler CBS.UL by the Obama administration, which rejected the turnaround plans put forward by those companies. [ID:nSP207882]
That was followed by comments from Canada that plans set out by the Canadian branches the two automakers do not go far enough to make them viable. [ID:nN30348498]
The S&P/TSX composite index .GSPTSE closed down 224.84 points, or 2.55 percent, at 8,596.22, wiping out much of last week's 3.7 percent gain.
At one point in the session, the TSX had fallen 4 percent to its lowest level since March 18.
Before the latest selloff, the TSX had rallied about 18 percent from a 5-year low hit in early March.
All 10 TSX sectors ended lower, led by a 4.3 percent skid by the financial index and a 3.7 percent drag among the energy group. Together, the two sectors account for about 55 percent of the overall index.
Energy shares were hit hard as the price of oil. a major Canadian export, fell nearly 6 percent, hurt by a rally in the U.S. greenback and slump in global stocks.
Shares of Canadian Natural Resources (CNQ.TO) fell 5.3 percent to C$48.76, while Suncor Energy SU.TO dropped 3.8 percent to C$28.25.
Campeau said the TSX could get a boost on Tuesday as it marks the end of the month, generally a time when investors rebalance their portfolios.
"The question we are all asking ourselves is whether we will see some asset reallocation of bonds into stocks."
$1=$1.26 Canadian Editing by Jeffrey Hodgson