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CANADA STOCKS-TSX hits 2-week low on U.S. fears; posts Q3 gain

* TSX falls 56.89 points, or 0.44 percent, to 12,787.19

* Index up 5.4 percent in quarter, biggest gain in year

* Brookfield Office Properties jumps on takeover deal

* SNC-Lavalin climbs on plans to sell AltaLink stake

* Petrominerales soars 51 percent on Pacific Rubiales bid

By John Tilak

TORONTO, Sept 30 (Reuters) - Canada's main stock index

dropped to its lowest in two weeks on Monday as hopes faded that

a U.S. budget impasse would be resolved in time to prevent a

partial government shutdown.

But for the third quarter, the Toronto stock market's

benchmark index recorded its biggest quarterly gain in a year,

outperforming the S&P 500 index, Wall Street's benchmark.

Monday's losses were limited by a 14.2 percent jump in the

shares of Brookfield Office Properties after parent

company Brookfield Property Partners said it will buy

the 49 percent of Brookfield Office it does not already own for

$5 billion in a deal that would consolidate the companies' $45

billion in real estate assets.

Dampening investor sentiment was political uncertainty in

Italy, where some senators from Silvio Berlusconi's center-right

party looked ready to form a breakaway group unless the former

premier backed down on his hard line to bring down Italy's

government and head to elections.

The U.S. Congress, still in partisan deadlock on Monday over

Republican efforts to halt President Barack Obama's healthcare

reforms, was on the verge of shutting down most of the U.S.

government starting on Tuesday morning.

"There is some nervousness as we approach the shutdown

deadline, but there are no signs of panic yet," said Elvis

Picardo, strategist at Global Securities in Vancouver, adding

that the Canadian market is viewing the debt crisis as a U.S.


"Investors believe that there will be a resolution to this

problem," he added. "It may not occur today or tomorrow, but

it's certainly what they're hoping for."

The Toronto Stock Exchange's S&P/TSX composite index

closed down 56.89 points, or 0.44 percent, at

12,787.19, after falling s low as 12,734.71, its lowest since

Sept. 16. All of the 10 main sectors on the index were in the


For the third quarter, the TSX advanced 5.4 percent,

compared with a 4.7 percent gain by the S&P 500.

Helped by a rebound in appetite for commodities, the

benchmark Canadian index has been regaining ground lost in the

first half of the year.

"I doubt if we've seen the highs for the year for the TSX,"

Picardo said. "I still think there are more legs to the rally."

Tracking a drop in the price of oil, shares of energy

producers shed 0.5 percent. In the group, Suncor Energy Inc

was down 1.3 percent at C$36.83, and Canadian Natural

Resources Ltd gave back 0.2 percent to C$32.37.

Financials, the index's most heavily weighted sector, fell

0.6 percent. Royal Bank of Canada dropped 0.8 percent to


But gold-mining stocks eked out a small gain, with Goldcorp

Inc climbing 0.9 percent to C$26.80, and Barrick Gold

Corp adding 0.4 percent to C$19.18.

SNC-Lavalin Group jumped 2.4 percent to C$42.35

after the engineering and construction company said it was

looking to sell an equity stake in AltaLink, Alberta's largest

regulated electricity transmission company.

Shares in Canadian oil company Petrominerales

soared about 51 percent to C$11.70 after it agreed to be taken

over by Pacific Rubiales, Colombia's largest private

oil producer.