TORONTO (Bloomberg) - Canadian stocks dropped for the third time this week as economic reports heightened concern that financial companies and energy producers' earnings will be hurt as the recession deepens and fuel demand wanes.

Royal Bank of Canada fell 4.9 percent as a gauge of financial shares extended a five-year low. EnCana Corp. paced a decline in energy companies as gasoline prices slumped after US fuel stockpiles increased more last week than analysts predicted. Potash Corp. of Saskatchewan Inc. advanced on posting better-than-estimated profit.

The Standard & Poor's/TSX Composite Index slid 3.1 percent to 8,486.56, wiping out Wednesday's three percent gain. Canada's main benchmark for stocks, which gets almost three-quarters of its value from financial, energy and mining shares, has dropped 5.6 percent this year, after a 35 percent decline in 2008.

"Financials are the Achilles' heel of the market right now," said David Cockfield, a portfolio manager at Leon Frazer & Associates in Toronto, which manages about $1.3 billion. "The banks are eco stocks. When the economy is contracting, there's less business and profit margins can get squeezed. The charts look awful - they all look like they'll retest their lows."

The Bank of Canada said today that the nation's output this quarter will shrink at a 4.8 percent annualised pace, after predicting in October that it would be unchanged. Canadian retail sales fell 2.4 percent in November, the most since August 1998, Statistics Canada said in Ottawa.

The economic data overshadowed remarks from a government official that Canadian Finance Minister Jim Flaherty's budget, scheduled to be announced next week, will include a deficit of C$34 billion in 2009 and C$30 billion in 2010 as part of the government's efforts to revive the economy. The official gave no details about how any stimulus would be directed.

Royal Bank fell C$1.55 to C$30.07, its lowest close since October 2004. The nation's biggest lender by assets said it was increasing a C$200 million ($158.5 million) sale of preferred shares announced yesterday by C$100 million. Royal Bank's common share also traded without right to the 50 cents dividend yesterday.