TORONTO - The Toronto stock market closed slightly lower in a volatile trading session Monday that reflected investor concern about the timing of an economic recovery and how much further stocks can rally.

Toronto's S&P/TSX composite index had tumbled almost 200 points in early trading but ended up clawing back most of those losses to end the day down 20.17 points to 10,549.12. Early declines in commodity stocks moderated considerably while financials moved into the positive column.

The three-month-old rally has boosted the TSX by almost 40 per cent this spring as commodity stocks surged on high hopes for a global economic turnaround by late this year or early next.

Shares of oil and gas stocks have run up almost 80 per cent while the base metals sector has soared about 300 per cent.

"Part of the recovery is tied to commodity prices and we certainly have seen commodity prices rebound as people have moved away from the depression scenario to sort of the more normal recession scenario," observed Norman Raschkowan, chief investment officer at Mackenzie Financial Corp.

The TSX energy sector was the leading decliner Monday, down 1.2 per cent as the July crude contract in New York lost 35 cents to US$68.09. Crude has doubled in price in the last four months on hopes of higher demand but hasn't been able to capitalize on Friday's advance over the US$70 a barrel mark for the first time since last October.

Decliners in the energy sector included Suncor Inc. (TSX:SU), down 71 cents to C$37.76.

On the junior Canadian market, the TSX Venture Exchange moved 6.17 points lower to 1,131.82.

In currency markets, the Canadian dollar was ahead 0.17 cent to 89.54 cents US after a rising U.S. dollar pushed the loonie down almost two US cents on Friday.

New York markets also came back from a sharp loss amid similar concerns about the duration of the rally, as well as speculation that the U.S. Federal Reserve could begin raising interest rates sooner than thought has grown because U.S. Treasuries continue to weaken, forcing yields higher.

"This is the sort of thing that may cause the stock market rally to let's say plateau and create the pullback that people have been sort of speculating about for a number of weeks," added Raschkowan, and noted that such a retracement wouldn't necessarily be a bad thing.

"We've just come out of what is normally a very strong seasonal period, January through May. Now you're going to go into the summer period and people are going to try and assess how solid is the economy, is it really stabilizing? And I think the truth is the jury is out on that."

On Wall Street, the Dow Jones industrial average closed 1.36 points higher to 8,764.49 after losing as much as 130 points earlier in the session.

The Nasdaq composite index gave back 7.02 points to 1,842.4 while the S&P 500 index was off 0.95 of a point to 939.14.

The 10-year Treasury bond rate jumped 38 basis points, or more than a third of a percentage point, last week while the two-year rate spiked 37 basis points last week, its highest level since November.

And there are concerns the 10-year bond yield could test four per cent for the first time since late October, double December's low. Late Monday afternoon, the 10-year bill yielded 3.9 per cent, up six basis points from Friday's seven month high.

Bond yields determine the level of general interest rates in the financial markets.

The Fed's cutting of short-term rates to almost zero has helped support the banking system and consumers, but the central bank might have to reverse that position now to keep the dollar strong and ensure that foreign governments will remain big investors in Treasury bonds, said Peter Jankovskis, co-chief investment officer at OakBrook Investments.

"There is genuine concern that maybe the Fed's hand has been forced," Jankovskis said.

On the economic front, Canada Mortgage and Housing Corp. said that the annual rate of housing starts increased to 128,400 in May from 117,600 in April. CMHC said the increase was broadly based, encompassing both single- and multiple-family homes.

Elsewhere in the TSX energy sector, Addax Petroleum Corp. (TSX:AXC) shares jumped $3.75 or 10.4 per cent to $39.75 after acknowledging rumours of talks with a potential buyer. Addax responded after South China Morning Post, an English language newspaper, reported China Petroleum and Chemical Corp. is working on a bid to acquire the company for $8 billion.

Speculation about higher rates had kept the financial sector in the red for most of the session. But the TSX financial sector ended up rising 0.5 per cent with Royal Bank (TSX:RY) ahead 59 cents to $46.09.

The TSX base metals sector was another TSX weight, stepping back 1.5 per cent as a stronger U.S. dollar helped send the July copper contract on the Nymex down 3.1 cents to US$2.253 a pound. Equinox Minerals (TSX:EQN) moved down 11 cents to $2.75.

The gold sector was ahead 0.7 per cent as the August bullion contract on the New York Mercantile Exchange fell $10.10 to US$952.50 an ounce.

In other corporate news, Angiotech Pharmaceuticals Inc. (NASDAQ:ANPI)(TSX: ANP) surged 65 cents or 33.7 per cent to $2.58 after it announced the U.S. Food and Drug Administration has granted clearance for its Option Inferior Vena Cava Filter in the United States. The filter is used for the prevention of recurrent pulmonary embolism.