TORONTO (Reuters) -Toronto's main stock index retreated yesterday after three days of gains as the US government's announcement that it will take an equity stake in Citigroup put pressure on the heavily weighted financial sector.

Financial shares dropped 3.3 percent on fears of the consequences of governments taking big stakes in banks after the US Treasury said it will convert some of the preferred stock it holds in lender Citigroup into common stock.

Such a move results in a "huge dilution to the current shareholders," said Jennifer Radman, vice president at Caldwell Investment Management Ltd.

"That's really the concern there," she said. "You'd like to be able to get into a stock and know that the earnings going forward are going to be entirely yours, but the banks seem to need more and more capital, so nobody's really certain how much more financings are to come."

Among the biggest contributors to the index's fall were insurer Manulife Financial , down nine percent at C$12.90, and Royal Bank of Canada , which shed 3.1 percent to C$30.92. Sun Life Financial dropped six percent to C$19.91, and Toronto-Dominion Bank fell 1.5 percent to C$37.39.

As well, Radman said investors were likely locking in profits after the financials sector rallied earlier this week as quarterly results from big Canadian banks topped expectations.

The S&P/TSX composite index closed down 63.80 points, or 0.78 percent, at 8,123.02, with four of its 10 main sectors lower. There was no change in the information technology sector.

The key index was up two percent on the week.

Industrials fell 1.41 percent, consumer discretionary stocks dropped 0.3 percent, while materials sagged 0.03 percent.

The index was also pressured by poor economic data, with revised figures showing the US economy contracted at its sharpest rate since early 1982 in the fourth quarter, while Canadian data showed the current account plunged into deficit in the fourth quarter for the first time in nearly a decade.

On the upside, Suncor Energy rose 3.12 percent to C$26.46, and EnCana Corp climbed 2.7 percent to C$50.20.

Potash Corp of Saskatchewan gained one percent to C$106.78.