The surprise resignation of European Central Bank board member Juergen Stark helped bring concerns over the region's debt back to the for. The news heightened fears that policymakers were not taking enough action to stem Europe's debt crisis.
"This has been dragging on for so long, it's beginning to look like the European Central Bank is unable to come up with a coordinated policy - or at least the members are not very cohesive as to how it should be handled," said Michael Sprung, president at Sprung & Co. Investment Counsel.
Investors were also concerned that Obama's proposed $447 billion package of tax cuts and spending plans aimed at boosting growth and job creation could be hamstrung by political wrangling.
"The market's not particularity enthused about Obama's job program. They don't a), believe it will be passed and b), that it won't put the U.S. further in debt," Sprung said.
Oil fell sharply, pressuring energy stocks on the TSX. The sector shed 1.73 percent, leading the broader index's decline.
Canadian Natural Resources (CNQ.TO: Quote) was down 2.5 percent to C$34.82, while Cenovus Energy (CVE.TO: Quote) fell 3.2 percent to C$32.87, and Suncor Energy (SU.TO: Quote) lost 2.5 percent to C$29.65.
Economically-sensitive financial issues sagged 1.2 percent. Royal Bank of Canada (RY.TO: Quote) was the biggest drag on the index, falling 1.7 percent to C$48.12.
At 11:58 a.m. (1558 GMT) the Toronto Stock Exchange's S&P/TSX composite index .GSPTSE was down 195.07 points, or 1.54 percent at 12,488.89. Nine of 10 main sectors were lower.
Adding to the gloom was news that the Canadian economy lost 5,500 jobs in August and the jobless rate rose to 7.3 percent from 7.2 percent. The data was far worse than forecast, and overshadowed other signs the economy was making a comeback after a bleak second quarter.
Focus remained squarely on policy makers, as finance chiefs from the Group of Seven richest nations are set to meet on Friday. The group is under heavy pressure to take action to revive flagging economic growth and calm the biggest confidence crisis in financial markets since the global credit crunch.
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