* TSX falls 95.82 points, or 0.75 percent, to 12,692.41 * Nine of 10 main index sectors decline * Talisman in focus after Icahn stake * Manitoba Telecom drops after government rejects unit sale By John Tilak TORONTO, Oct 8 (Reuters) - Canada's main stock index dropped on Tuesday to its lowest in five weeks as a political standoff in Washington highlighted the crisis over the U.S. debt limit and threatened to push the world's biggest economy into default. Talisman Energy Inc found itself in the spotlight after activist investor Carl Icahn disclosed a stake in the company late on Monday. The stock jumped in early trade before paring those gains to slip with the broader market. The Toronto market gave up its gains as hopes of a speedy resolution to the fiscal crisis took a beating after President Barack Obama said he would be willing to negotiate on budget issues only after the Republicans agreed to re-open the federal government and raise the debt limit with no conditions. "It's a bit of a buyers' boycott," said Irwin Michael, portfolio manager at ABC Funds. "People are gun-shy, and they want to sit and watch until the dust settles." "We believe it will be resolved and the market will eventually do better," he added. "However, in the short run people's imagination is running wild." The Toronto Stock Exchange's S&P/TSX composite index closed down 95.84 points, or 0.75 percent, at 12,692.41, after falling to as low as 12,682.94, its weakest level since September 3. Michael expects the index to end the year higher after the current U.S. fiscal turmoil eases. Nine of the 10 main sectors on the index were in the red on Tuesday. Energy shares dropped despite rising oil prices. Suncor Energy Inc stumbled 2.1 percent to C$35.81, and Canadian Natural Resources Ltd fell 0.2 percent to C$32.11. Talisman shares slipped almost 2 percent to C$12.89. Financials, the index's most heavily weighted sector, fell 0.3 percent. Royal Bank of Canada, the country's biggest lender, lost 0.2 percent to C$66.37. Valeant Pharmaceuticals International Inc gave back 3.6 percent to C$109.80 and had the biggest negative influence on the market. Shares of Manitoba Telecom Services Inc shed 8.5 percent after the company said late on Monday the Canadian government rejected the proposed sale of its Allstream division to Accelero Capital Holdings due to "unspecified national security concerns."