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TORONTO (Reuters) - Toronto's main stock index tumbled more than 3 percent on Thursday, rattled by fears that the world economy might fall into a new recession and the possibility that the European debt crisis might spread to the U.S. banking sector.
All 10 of the TSX index's main sectors were down sharply, though some gold miners rallied on record bullion prices and financial shares lost less than their U.S. counterparts, helping the index outperform markets south of the border.
U.S. indexes were down around 4-5 percent, while U.S. oil futures plunged more than $5 a barrel and other commodity prices also sold off.
The Toronto Stock Exchange's S&P/TSX composite index closed down 392.90 points, or 3.12 percent, at 12,186.71, its lowest close since August 9.
Among the heaviest decliners, Suncor Energy plunged 6.5 percent to C$29.67, Canadian Natural Resources lost 6.2 percent to C$33.91, and Potash Corp dropped 5.2 percent to C$51.38.
"When people woke up this morning, the glass wasn't half full, it was empty," said Paul Hand, managing director at RBC Capital Markets.
Hand said he would describe the collective mood of investors as "manic" given the malaise in the global economy and Europe's spreading debt crisis.
Morgan Stanley said on Thursday the United States and the euro zone were "dangerously close to recession", while an onslaught of disappointing U.S. economic data, including factory activity, home resales, jobless claims and inflation, added to the gloomy mood.
Meanwhile, the New York Times reported the United States is investigating whether Standard & Poor's improperly rated dozens of mortgage securities in the years before the financial crisis, while the Wall Street Journal said regulators are questioning the U.S. units of Europe's banks more closely to see if they have the funds they need to operate reliably.
"Until the European authorities, (French President Nicolas) Sarkozy and (German Chancellor Angela) Merkel, get together and say we will unconditionally guarantee all deposits at banks in the European system, then you're not going to get a resolution of this," said Gavin Graham, president of Graham Investment Strategy.
Many money managers, however, said the market drop was overdone, with some smaller to mid-cap stocks looking extraordinarily cheap.
"It's like 'Chicken Little,' the sky is falling, and people are very nervous," said Irwin Michael, portfolio manager at ABC Funds, noting the cover story of Maclean's magazine this week with the headline: "This could get really ugly."
"This is a liquidity-driven decline ... there's a desire for liquidity and it appears that investors, whether they be institutions or retail, are just selling down to their sleeping point," he added, noting that markets are even more volatile because volume is light.
Among the top gainers on the index, software company Open Text surged 6 percent to C$54.00, New Gold jumped 1.5 percent to C$12.15, and Agnico Eagle added 0.6 percent to C$63.00.
Editing by Peter Galloway