TORONTO - The Toronto stock market finished sharply lower Tuesday as the resource heavy TSX was hit by sliding commodity prices as the U.S. dollar strengthened and investors also worried about downgrades to government credit ratings.

The S&P/TSX composite index dropped 120.7 points to 11,368.93 as the Bank of Canada said it was leaving interest rates unchanged at 0.25 per cent.

The Canadian dollar was down 0.99 of a cent to 93.99 cents US. The central bank warned that the main risks to an economic rebound are "a more protracted global recovery and persistent strength in the Canadian dollar that could act as a significant further drag on growth and put additional downward pressure on inflation."

Investor sentiment took a knock after Moody's Investor Services warned that the United States and Britain must get a grip on their public finances to avoid threats to their top Triple-A credit ratings.

Moody's said the public finances in both countries are deteriorating considerably and may therefore "test the Aaa boundaries" in future.

The Moody's report comes as rival Fitch cut Greece's credit rating from single-A-minus to BBB-plus. It said the downgrade "reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery."

And Moody's again downgraded six state-linked companies in Dubai as fresh concerns surfaced about the troubled Arab boomtown's debt woes.

Analysts also point out that investors are finding it tough to find reasons to send markets higher in light of the strong rally that started in early March and has gone along with hardly a break since.

"I don't think we're overvalued, I don't think we're undervalued, I think we're just kind of trading on the whims of news items these days and people are just kind of coasting to the end of the year from this point," said Chris King, vice-president and portfolio manager at Morgan, Meighen and Associates.

Financials were lower as Bank of Nova Scotia (TSX:BNS) missed earnings expectations. Scotiabank shares were down $1 to $47.61 as the bank reported net income of $902 million or 83 cents per share for the fourth quarter, up from year-ago profit of $315 million or 28 cents per share. Analysts had expected 87 cents a share.

Overall, the financials sector slipped just under one per cent with CIBC (TSX:CM) down $1.08 to $69.14.

The January crude contract on the New York Mercantile Exchange gave back $1 to US$47.61 a barrel and the energy sector declined 1.59 per cent. Suncor Inc. (TSX:SU) was down 72 cents to $36.04 while Canadian Natural Resources (TSX:CNQ) moved $1.79 lower to $66.91.

The gold sector was down 2.75 per cent. A stronger American currency pushed the February gold contract on the New York Mercantile Exchange down $20.60 to close at US$1,143.40 an ounce.

Barrick Gold Corp. (TSX:ABX) faded $1.53 to $43.10 and Goldcorp Inc. (TSX:G) stepped back $1.32 to $42.24.

The base metals sector was off 2.14 per cent as March copper slipped four cents to US$3.165 a pound. HudBay Minerals (TSX:HBM) lost 58 cents to $13.42.

Global mining company Xstrata PLC is recording about $2.4 billion in writedowns linked to its copper and nickel assets, many of them in Canada. Xstrata, which acquired Toronto based nickel and copper producer Falconbridge several years ago, is slashing 670 jobs by closing Canadian copper and zinc smelters in northern Ontario by May 2010.

Teck Resources Ltd. (TSX:TCK.B) shares declined 86 cents to $34.84 after it said it expects coal production in 2010 to be 23.5 million to 25 million tonnes and is planning for further production increases in 2011 and 2012.

All sectors were lower save for gains in the industrial and tech components. Research In Motion Ltd. (TSX:RIM) climbed $1.69 to $65.09 and Canadian Pacific Railway (TSX:CP) rose $1.45 to $55.79.

The TSX Venture Exchange was down 32.16 points to 1,402.24.

New York markets also fell with the Dow Jones industrial average falling 104.14 points to 10,285.97, the Nasdaq composite index declined 16.62 points to 2,172.99 while the S&P 500 index moved down 11.32 points to 1,091.93.

In other corporate news, uranium miner Cameco Corp. (TSX:CCO) said Tuesday it has signed a deal to sell its remaining stake in Centerra Gold Inc. (TSX:CG) for $872 million. Cameco shares fell $1.54 to $31.17 while Centerra shares dropped $1.41 to $11.19.

Provincial pension fund giant Caisse de depot et placement du Quebec is selling all its common shares in Atlantic Power Corp. (TSX:ATP), representing nearly 19 per cent of the total, for $121.9 million. It's not known who the purchasers are and Atlantic shares were down 77 cents to $10.50.

Garda World Security Corp. (TSX:GW) shares ran ahead 77 cents to $9.87 after it said Tuesday it had been awarded a US$100-million contract from the U.K. Foreign and Commonwealth Office to provide security services for the British Embassy and its offices in Iraq.

Shares in Stornoway Diamond Corp. (TSX:SWY) jumped 5.5 cents or 18 per cent to 36 cents after the Vancouver-based miner delivered a positive report on its Renard Diamond Project in North Central Quebec.

On the economic front, Canada Mortgage and Housing Corp. said the seasonally adjusted annual rate of housing starts reached 158,500 units in November, up 1,100 units from October. The agency added that the November total is the highest of the year.