* TSX down 332.63 pts, or 2.7 pct, at 12,156.22
* Italian bond yields hit 7 pct, sparking fears
* Energy, materials sectors lead market lower
* Index has biggest one-day drop since Oct. 3 (Adds further analyst comment, details)
By Jon Cook
TORONTO, Nov 9 (Reuters) - Canadian stocks had their biggest one-day drop in a month on Wednesday as a spike in Italian bond yields sparked fears that Europe's debt crisis has entered a dangerous new phase that will threaten the global economy.
Global stocks and commodity prices took a pounding after Italy's 10-year bond yields rose above the precarious 7-percent level, which had previously caused other European Union countries such as Greece, Ireland and Portugal to seek bailouts. [MKTS/GLOB]
Investors are concerned that at those levels Italy will be unable to continue to pay its more than 2 trillion euro debt burden and the country could be too big for euro zone and international lenders to bailout.
"It's a severe risk off day," said Patricia Mohr, a commodity market specialist at Scotia Capital. "When this concern intensifies, investors have been shifting out of equities and commodity futures positions into cash and the security of U.S. Treasury securities."
The Toronto Stock Exchange's S&P/TSX composite index .GSPTSE plunged 332.63 points, or 2.7 percent, to 12,156.22. It was the exchange's worst one-day performance since Oct. 3.
Energy stocks led the Canadian market lower, falling more than 4 percent. The biggest drag was Suncor Energy Inc SU.TO, which plunged 5.6 percent to C$31.44.
The heavily weighted materials sector dropped 3 percent, led by Potash Corp POT.TO, which slid 4 percent to C$47.63.
Its base metals mining subsector dropped heavily, falling nearly 8 percent.
The biggest loser among base metal producers was First Quantum Minerals FM.TO, whose shares fell more than 14 percent to C$19.76 a day after the Vancouver-based miner lowered its full-year production outlook to reflect a dip in quarterly production. [ID:nL4E7M83WT]
Even gold shares, a traditional safe haven, did poorly. After hitting a near two-month high at the start the week, the Canadian subindex of gold mining stocks fell nearly 2 percent.
Despite limited direct exposure to European government debt holdings, Canadian financial stocks still fell 2.3 percent, led down by Royal Bank of Canada RY.TO, which fell 2.8 percent to C$45.13.
"It's fear of contagion," said John Kinsey, portfolio manager at Caldwell Securities Ltd. "They're the third-largest economy in Europe and this is really where the fear factor comes in. It's not just Greece with 10 million people."
"If (the EU) economy goes down that affects China because they were a big importer from China and people are worried the Chinese economy will slow."
Top U.S. bond manager PIMCO, one of the world's largest holders of Italian sovereign debt, said Italy's debt woes represented "a new, even more dangerous phase in Europe's debt crisis." [ID:nN1E7A8104] (Editing by Jeffrey Hodgson)