Toronto stocks closed sharply lower Thursday after a report showed crude inventories in the U.S. were much higher than expected, and investors sold off banking shares.

The S&P/TSX composite index closed down 271.33 points to 8,486.56, more than wiping out Wednesday’s 253-point gain.

The financial group fell 6% as investors worried about a steady drip of quarterly losses reported by big overseas banks, including Royal Bank of Scotland and U.S. Bancorp.

Toronto-Dominion Bank and National Bank announced new issues of preferred stock to boost their capital reserves. TD common shares fell $1.61 to $39.67 while National Bank edged 11¢ lower to $32.95.

On Wednesday, the Royal Bank of Canada and Bank of Nova Scotia both announced issues of preferred shares. Royal common shares lost $2.05 to $30.07 and Scotiabank shed $1.62 to $28.08.

The energy group fell 4.4% after the U.S. Energy Information Agency said crude supplies rose by 6.1 million barrels last week, more than triple the increase the market expected.

The March crude contract in New York added 12¢ to US$43.67 a barrel.

EnCana Corp. shares fell $2.49 to $52.75 while Suncor Inc. lost $1.66 to $22.92.

Among the session’s gainers, Potash Corp. of Saskatchewan rose $4.59 to $91.19 after its full-year earnings tripled to $3.5 billion.

The base metals sector backed off 3.2%. Teck Cominco Ltd. fell 39¢ to $5.29.

The gold sub-group was off 2% as the February bullion contract in New York rose US$8.70 to US$858.80.

Shares in Research In Motion Ltd. were off $1.08 at $65.67 following a report in The Globe and Mail that Ontario Securities Commission and RIM co-chief executive officers Jim Balsillie and Mike Lazaridis are negotiating a settlement related to their role in a stock option accounting controversy dating back to 1996.

The junior S&P/TSX Venture composite index slipped 1.34 points, or 0.16%, to finish at 850.21.

The Canadian dollar rose 0.13 cent to US79.76¢ as Statistics Canada reported retail sales in November registered the steepest decline in almost a decade, down 2.4% from October.

In New York, U.S. stocks slid after Microsoft’s proposed job cuts and disappointing earnings shook investors, while economic data showed further decline in the labor and housing markets.

Microsoft Corp. shares fell after software maker said it would cut up to 5% of its estimated work force over the next 18 months. The company warned that it could no longer offer profit forecasts for the rest of the fiscal year after posting a quarterly profit that fell short of expectations.

The stock ended down 11.7% at US$17.11.

The Dow Jones industrial average fell 105.30
points, or 1.28%, to 8,122.80. The S&P 500 dropped 12.74 points, or 1.52%, to 827.50. The Nasdaq composite index fell 41.58 points, or 2.76%, to 1,465.49.

Bank of America’s stock stumbled 14.5% to US$5.71 after the bank said former Merrill Lynch & co-CEO John Thain is leaving the bank, which recently acquired Merrill.