TORONTO - The resource sector led the way to a steep decline on the Toronto stock market Wednesday as investors grew increasingly pessimistic about the potential economic consequences of a U.S. failure to raise its debt limit.

The S&P/TSX composite index racked up its second straight triple-digit slide, tumbling 267.89 points to 13,032.67 while the TSX Venture Exchange was off 37.74 points to 1,985.78.

New York markets also plunged amid positive earnings news and a big disappointment in the manufacturing sector with the latest durable goods numbers.

New York's Dow industrials fell 198.75 points to 12,302.55. The Nasdaq lost 75.17 points to 2,764.79 while the S&P 500 index was down 27.05 points to 1,304.89.

"There's a lightening up of positions in this market, people don't know what to do," said Azim Hajee, senior trader at futures trader Lind Waldock, adding markets fear that "if they don't fix the debt ceiling, we could go into a massive, double-dip recession."

Sliding crude prices and late-day strength in the greenback pushed the Canadian dollar down 0.68 of a cent to 105.39 cents US.

The United States has until Aug. 2 to reach a deal to increase its US$14.3-trillion debt limit or face not being able to pay its bills. That has led to fears the country could default on its financial obligations, which could send shockwaves through financial markets.

But even if a deal is reached, there are fears the U.S. could still lose its top credit rating, which would lead to much higher interest payments.

"That's the reason commodity markets are under pressure, it's tied to the interest rates," added Hajee.

"It looks like compromises are getting harder in Washington. And that's the reason people are liquidating very large positions... because of the fear that if they default, the interest rates would go up by two or three per cent so the cost of carrying commodity markets will be expensive."

Oil prices also retreated on data from the U.S. Energy Information Administration that reported oil inventories rose 2.3 million barrels last week, against a decline of one to two million barrels that analysts had expected. Gasoline inventories rose one million barrels.

The September contract on the New York Mercantile Exchange fell $2.19 to US$97.40 and the energy sector fell 2.2 per cent.

Suncor Energy (TSX:SU) lost $1.06 to C$38.14 and Canadian Natural Resources (TSX:CNQ) declined $1.14 to C$39.48.

Copper prices also weakened, giving back a chunk of Tuesday's seven cent gain. The September contract in New York gave back three cents to US$4.45 and the base metals sector lost 2.93 per cent. HudBay Minerals (TSX:HBM) was down 51 cents to C$13.34 while Teck Resources (TSX:TCK.B) gave back $2.38 to $47.29.

Sherritt International Corp. (TSX:S) shares were down 18 cents to C$6.09 after the diversified mining company said its quarterly net income was $60.1 million or 20 cents per share, up 20 per cent from a year ago but five cents below estimates. Revenue improved 23 per cent to $500.6 million.

The financial sector was also a major drag, down 1.61 per cent as TD Bank (TSX:TD) shed $1.68 to $77 and Manulife Financial (TSX:MFC) fell 45 cents to $15.15.

The tech sector was also lower with Research In Motion Ltd. (TSX:RIM) down $1.49 to $24.37.

Moody's Investors Service said it has downgraded Nokia's credit rating as the world's largest producer of mobile phones sees its competitive position in the smartphone segment deteriorate. Moody's downgraded the Finnish phonemaker's debt rating by two notches from A3 to Baa2 due to a "severe weakening" of Nokia's business position. Nokia fell 2.7 per cent to US$5.73.

Hostile takeover target Zarlink Semiconductor (TSX:ZL) said that its first-quarter profit dropped to US$2.4 million from $10.3 million a year ago. Revenue slipped six per cent from the same time last year to $55.4 million. Zarlink is fending off an offer of C$3.35 per share or US$548.7-million from Microsemi Corp. and its shares added five cents to $3.66.

The gold sector also declined as bullion prices backed off $1.70 from Tuesday's latest record close to US$1,615.10 an ounce. Goldcorp Inc. (TSX:G) was down $1.73 to C$48.23 and Barrick Gold Corp. (TSX:ABX) faded 98 cents to C$46.

Industrials stocks were lower in the wake of a disappointing read on U.S. durable goods orders.

Canadian Pacific Railway Ltd. (TSX:CP) gave up early gains to close down 37 cents to $58 after it reported that spring flooding affected second-quarter results. However, conditions have since returned to normal. Net income fell to $128 million from $166.6 million a year ago while revenue increased slightly to $1.26 billion from $1.23 billion.

U.S. durable goods orders for June fell 2.1 per cent. Economists had expected a rise of 1.5 per cent. Excluding the transportation sector, orders gained 0.1 per cent.

Boeing Co. says its second-quarter profit rose almost 20 per cent to US$941 million as it delivered more commercial airplanes. The company raised its outlook for the full year. Revenue rose 6.2 per cent to $16.54 billion and its shares rose 0.67 per cent to US$70.63.

Dow Chemical's shares were 2.4 per cent weaker to US$34.99 as the company said second-quarter profit surged 73 per cent to US$982 million on a combination of higher prices, increasing sales and comparison to weak results a year-ago due to one-time charges. Revenue rose 18 per cent to $16.05 billion.

Dow is a bellwether of economic health because of its diverse array of customers, including manufacturers of toys, automobiles, farming equipment and LCD televisions.

In other corporate news, Singapore-based private investment group Richard Chandler Corp. has increased its stake in stake in beleaguered Chinese forestry firm Sino-Forest (TSX:TRE) to nearly 15 per cent. The move pushed its battered shares up 57 cents to $7.69. The company's shares plunged June 2 after a damning analyst report by Muddy Waters Research that raised questions about its financial reporting and operations.