* Toronto stocks end up 1.8 percent in third day of gains
* Late surge in oil prices fuels market
* Index's 35 percent drop in '08 is biggest since 1931 (Adds comments, details)
By Jeffrey Jones
CALGARY, Alberta, Dec 31 (Reuters) - Toronto's main stock index jumped nearly 2 percent on Wednesday to end the worst year for Canadian stocks since the Great Depression on a positive note as oil prices staged a late-session rally.
The S&P/TSX composite index .GSPTSE closed up 156.98 points, or 1.8 percent, at 8,987.70 in a third-straight session of triple-digit gains.
That still translates into a full-year drop of 35 percent, the biggest for the stock market since 1931, according to TSX figures. The Dow Jones industrial average in the United States also had its worst performance since that year, falling 34 percent.
"It's a positive day for a bad year, and we've had a few positive days now," said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier in Toronto.
"It's nice to see green on the screen -- meaning go ahead -- as opposed to red -- stop and rethink your strategy."
All 10 main subgroups ended higher, led by health care, up 4 percent, information technology, up 3 percent, and consumer staples, up 2.5 percent.
Oil prices surged late in the session to end up $5.57, or 14 percent, at $44.60 a barrel, lifted by concern about winter fuel supplies amid slowing refinery activity. [ID:nSP253619]
Despite the jump, crude is down more than $100 a barrel from its high set in July. Analysts have blamed the steep drop in oil and other commodities -- which were pressured by the global economic crisis -- for the brutal year for stocks.
Before the meltdown, Canada was riding a resource-driven boom with its abundance of oil, minerals and grain.
The year's worst performing TSX sector was information technology, which lost half its value as expenditures on tech gear dwindled. It was followed by financial services, which skidded 39 percent, and energy, which fell 38 percent.
Consumer staples, such as grocery store chains, suffered the smallest drop at about 8 percent.
Nakamoto said the weakness among banks and financial service firms was a surprise, as Canadians have viewed their financial system as one of the most stable in the world, while multibillion-dollar bailouts are the order of the day elsewhere.
"I don't think they got as hurt, but still the magnitude of the decline has caused Canadian investors to rethink that," he said.
Which sector fares best in 2009 will depend on the performance of the economy. If a recovery begins in the next few months, commodity producers could rebound, he said. If not, look for consumer staples and other safe-haven names to remain in demand.
Many market observers expect to see signs of recovery in the second half of the year.
"The economic numbers will be worse, but the market numbers will start to look a lot better," said Andrew Pyle, wealth advisor at ScotiaMcLeod in Peterborough, Ontario.
Much is dependent on improved credit markets and the effect of a new U.S. administration, he said.
"It's not out of the question to see the TSX putting on 20 percent in the first six months of the year. The trick will be what happens when we get to these thresholds," Pyle said.
Among big movers on Wednesday, Research in Motion RIM.TO, maker of the BlackBerry, jumped 4 percent to C$49.50.
Labopharm DDS.TO surged 39 percent to C$2.26 after it said it won its first U.S. regulatory approval for the once-daily chronic pain drug Ryzolt. [ID:nN31303720]
Oilexco OIL.TO was the most traded stock and biggest percentage loser, down 68 percent at 28.5 Canadian cents, after the oil explorer said its British unit faced insolvency. [ID:nLV536038]
The blue chip S&P/TSX 60 index .TSE60 closed up 8.92 points, or 1.7 percent, at 541.82.
On Wall Street, the Dow .DJI rose 108.00 points, or 1.25 percent, to 8,776.39, while the Nasdaq composite index .IXIC ended up 26.33 points, or 1.7 percent, at 1,577.03.
$1=$1.22 Canadian Additional reporting by Ka Yan Ng and Allan Dowd; editing by Rob Wilson