TORONTO (Reuters) - Toronto's main stock index closed sharply higher yesterday as oil and gas issues climbed with rising crude prices, while financials strengthened as fears over the fate of the troubled US banking sector eased.

In see-saw action, the benchmark index swung nearly 300 points from trough to peak, with the upside supported by strength in energy issues as oil settled nearly 4 percent higher at $39.96 a barrel. The main pressure to the downside came from weaker gold prices.

Oil and gas stocks rose 5.5 percent, while the materials sector, home to gold-mining stocks, sank 5.2 percent.

The heavily weighted financial services sector led the TSX higher, and finished the day up 7.2 percent. The sector followed US stocks higher after Federal Reserve chairman Ben Bernanke signalled that nationalisation of major US banks was not at hand.

As well, markets were higher ahead of US President Barack Obama's speech last night, said Fergal Smith, managing market strategist at Action Economics. The speech was expected to lay out the blueprint for the administration's economic plans.

"Part of it is the market is quite short financials so I think there's an incentive to cover shorts ahead of Obama's speech tonight," Smith said.

"In Canada, in particular, we've got the bank earnings starting tomorrow so there's some incentive, for the speculative guys, to take some risk off the table."

The Toronto Stock Exchange S&P/TSX composite index closed up 211.66 points, or 2.77 percent, at 7,859.33, with nine of its 10 main groups advancing.

The index rose sharply at the open, rebounding from multi-year closing lows ion both Canadian and US markets on Monday. At one point yesterday, however, the index retreated to touch its lowest level since October 2003.

The market volatility signals "there's a lot of uncertainty out there," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.

"We wouldn't have such big swings unless there was a great deal of uncertainty," he said.