TORONTO (Reuters) - Toronto's main stock index climbed to its highest level in two years yesterday, pushed up by rising commodity prices and a firm banking sector.

The index closed at 12,382.82, the day's high, up 0.85 percent and its highest level since September 2008. Its previous 2010 high was reached in late April.

The TSX index stumbled early in the day, but robust manufacturing data from China, a broadly weaker US dollar and a drop in oil in storage in the US drove up commodity prices and associated share prices.

Oil rose two percent and copper jumped to more than a two-year high.

"What's driven the market over the last number of years has been clearly the materials area," said Don Reed, president and chief executive of Franklin Templeton Investments.

"Also, we have the best banking system in the world. Banks sustained everything through the downturn because we weren't stuck with a lot of sub-prime loans."

Mr. Reed added that infrastructure growth in emerging economies such as China - and low interest rates to support new projects - should continue to drive the Canadian market higher as long as commodity prices sustain themselves.

"The TSX is not cheap, but it still does have some room to move higher. The cautionary note is that nothing goes up in straight line and we will continue to see volatile markets here and other places around the world."

The TSX still has more than 15 percent to go to reach the peak above 15,000, which it hit in June 2008, Mr. Reed noted.

All three of the TSX's most heavily weighted groups put in solid performances. The energy sector was up two percent, financials, up 0.4 percent, and materials, up 0.4 percent.

Heavyweight gainers included oil company Canadian Natural Resources, up 2.8 percent at C$35.53, miner Teck Resources which added 1.6 percent to C$41.97, and Bank of Nova Scotia, which advanced 1.2 percent to C$54.80.

Gold extended its record-breaking rally, rising above $1,310 an ounce while silver hit a 30-year high as the greenback weakened on expectations of more U.S. monetary easing.

Barrick Gold Corp., the world's No.1 producer, rose 0.6 percent to C$48.57, and Silver Wheaton added 1.1 percent to C$27.92.

Market watchers also pointed to fund managers and large institutional investors adding to their portfolios before the end of the month and quarter Thursday as another factor in the market's rise.

Ron Meisels, technical analyst and president of Phases & Cycles, said this helped the market break through the April high, a key technical resistance level.

"The only thing we have to be careful of is that today is the penultimate day of the month," Mr. Meisels said, noting that profit-taking tomorrow and Monday at the beginning of October could cut some of the gains.

Among the gainers, technology stocks advanced 2.3 percent as Research In Motion jumped 3.4 percent to C$50.04, following the introduction this week of the BlackBerry Playbook.