TORONTO (Reuters) - Toronto's main stock index fell yesterday alongside a global sell-off of risk-prone assets after fears about the health of the European banking sector came back into focus.

Worries about Europe's banks resurfaced after the Wall Street Journal reported major European lenders understated holdings in potentially risky government debt during "stress tests" designed to shore up confidence. The report hurt stock and commodity prices as it pushed investors toward shelter in safer havens.

Also weighing on the market, Germany's banking association said the country's 10 biggest banks may need 105 billion euros in new capital as regulators revamp rules designed to prevent future crises.

Among the Toronto index's biggest decliners, financial shares lost 0.8 percent and energy shares fell 1.1 percent.

Toronto-Dominion Bank shed 1.1 percent to C$73.58, while Suncor Energy was down 1.3 percent at C$33.47.

Base metals prices, down two percent, were also hit hard. Base metals miner Teck Resources was down 2.4 percent at C$38.74.

"I think we will see (the euro zone) back on the front burner," said Jason Hornett, vice-president and fund manager at Bissett Investment Management.

"With countries like Greece and Spain, some of those countries that were concerns earlier in the year probably will come back to the forefront, and we'll see investors reacting to different events going on in those markets."

A surge in gold prices to their highest level since late June limited the index's losses. Gold-mining stocks were up 1.3 percent with Barrick Gold Corp. 1.8 percent higher at C$47.93.

"I think investors are probably looking for some safe havens in this market just with that negative news on the banking industry," Mr. Hornett said.

The S&P/TSX composite index closed down 42.94 points, or 0.35 percent, at 12,101.89, with six of its 10 main sectors lower.

The index's materials group was up 0.5 percent on the back of the gold rally. So-called "defensive" sectors such as telecoms and utilities also advanced.

Barry Schwartz, vice-president and portfolio manager at Baskin Financial Services, said investors were taking a breather after the market's recent rally.

The index gained two percent last week to its strongest level since early July, after stronger-than-expected US economic data helped to quell fears of a double-dip recession.