* Energy sector turns negative after initial charge
* RBC cuts share-price targets on five banks, Manulife
* Gold stocks lone area of strength
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By Cameron French
TORONTO, Oct 7 (Reuters) - The Toronto Stock Exchange’s main index dropped nearly 4 percent on Tuesday to end below the key 10,000 level for the first time in three years as fears that the credit crisis could balloon to a global recession prompted broad selling.
Energy stocks gave up early gains to lead the way downward, despite oil prices that eked higher on the day, a move that some saw as a sign that equity investors believe a global recession that will sap demand for commodities is all but inevitable.
“Certain people have moved to a full blown mental state on what’s going to happen to the global economy, and therefore they think commodity prices may come down further,” said Paul Hand, managing director at RBC Capital Markets.
The TSX energy group fell 6.3 percent during the session, one of nine sectors to end lower. Only one index sector rose, the mining-heavy materials group, which eked out a 0.18 percent gain on the back of gold stocks as bullion benefited from its appeal as a safe-haven investment.
Compton Petroleum CMT.TO led energy stocks lower, dropping 17.1 percent to C$3.25, while Petro-Canada PCA.TO retreated 8 percent to C$27.80.
The S&P/TSX composite index .GSPTSE ended down 400.88 points, or 3.9 percent, at 9,829.55, dropping for the fifth straight day, a period over which the index has lost 16.4 percent.
The close below 10,000 was the index’s first since July 2005.
Following a 5 percent plunge on Monday, the index rallied by nearly 300 points off the open, but then turned lower as the initial enthusiasm once again ran into a wall of eager sellers.
“What you’re seeing is some people come in thinking that they’ve got good valuations and they go jump in and buy a bit of the market, and then any increasing stock price is met by a steady stream of selling,” said Andrew Martyn, portfolio manager at Davis-Rea.
“Any nail that pokes its head up is immediately pounded down.”
Financial stocks tipped 4.4 percent lower, led by weakness among insurers amid concern of more U.S. bank failures and growing credit troubles in Europe.
Also weighing on the sector, RBC Capital Markets cut estimates and price targets on several Canadian companies, citing a deteriorating macroeconomic environment.
Insurance giant Manulife Financial (MFC.TO) fell 5.9 percent to C$32.67, while property and casualty insurer Kingsway Financial KFS.TO fell 14.7 percent to C$5.12.
The industrials subgroup fell 4.4 percent on concerns about the aviation industry, as plane and train manufacturer Bombardier Inc (BBDb.TO) slid 9.4 percent to C$4.55, and flight simulator company CAE Inc (CAE.TO) plunged 11.7 percent to C$6.54.
The blue-chip S&P/TSX 60 .TSE60 retreated 23.43 points, or 3.8 percent, to 592.25.
Trading volume totaled 600.5 million shares, valued at C$9.3 billion. Declining issues outnumbered advancers 1,263 to 414.
U.S. markets fell more sharply as U.S. Federal Reserve Chairman Ben Bernanke cautioned that the downside risks to economic growth have worsened.
The Dow Jones industrial average .DJI dropped 508.39 points, or 5.1 percent to 9,447.11, while the tech-heavy Nasdaq composite .IXIC fell 108.08 points, or 5.8 percent to 1,754.88.
$1=$1.11 Canadian Reporting by Cameron French; Editing by Peter Galloway