TORONTO (Reuters) - The main index of the Toronto Stock Exchange plunged 4 percent yesterday in a broad selloff triggered by the failure of Wall Street investment bank Lehman Brothers and a big drop in the price of oil.

The bankruptcy protection filing by Lehman, as well as the sale of Merrill Lynch and the fight for survival unfolding at US insurance giant American International Group , sent investors fleeing from every sector of the Toronto market.

"The TSX is being hit in a big way by what's happening in the US financial industry," said Elvis Picardo, an independent strategist based in Vancouver. "There's a contagion effect at play here."

US crude fell $5.47, or 5.41 percent, to settle at $95.71 a barrel, partly in reaction to the turmoil but also because of early signs that Hurricane Ike had spared key US energy infrastructure along the Gulf of Mexico.

The S&P/TSX composite index fell 515.55 points, or 4.04 percent, to close at 12,254.03. It was the biggest drop since late January.

"Going into this month, we were one of the few indexes worldwide to be still holding up to some extent," Picardo said. "But the global selloff has caught up in a big way."

Every group on the benchmark composite gave up ground yesterday, including the heavyweight energy sector, which shed 6.05 percent, and the materials group, which fell 6.13 percent. Financials lost 1.91 percent.

The list of the day's biggest net losers read like a "who's who" of Corporate Canada, featuring a diverse array of premier names dragged lower by the fire sale that took place on the TSX.

BlackBerry maker Research In Motion fell C$7.76, or 6.9 percent, to close at C$104.60. Suncor Energy dropped C$3.95, or 7.9 percent, to finish at C$46.25. Telecoms major BCE Inc lost C$1.75, or 4.4 percent, to finish at C$37.85.

While many investors ran for the exits, David Baskin, president of Baskin Financial Services, said selling into a storm like this one may not be the best strategy.

"In our experience, chickens get slaughtered," he said. "As we are seeing, the market is having a very rough opening but will likely improve by the end of the week. Those invested in high quality securities have little to fear."