The BSE benchmark opened with a 144-point gain and raced past the 17,000 mark as market players cheered Finance Ministry's proposal that the controversial General Anti-Tax Avoidance Rules (GAAR) would not be applicable below a particular limit.
The sentiment as also helped by reports from Europe suggesting that a new plan is being worked out to support the ailing banks of the debt-ridden trading bloc.
Asian indices including Hong Kong, Taiwan, Japan and China closed with gains of up to 2 per cent while European indices were trading 1-2 per cent higher in early trade on the news.
The BSE benchmark index settled at 17,429.98 - a level last seen in April 19 -- higher by 439.22 points or 2.59 per cent. On June 6, Sensex clocked a gain of 434 points.
Across the market, around 1,870 stocks rose with investor wealth going up by Rs 1.17 lakh crore to Rs 61.52 lakh crore.
Foreign inflows improved into Indian stocks after investment bank Morgan Stanley upgraded the Indian stock market to "equal-weight" from the long-standing "under-weight" status saying current valuations are similar to the low levels seen in 2002 and 2008.
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As many as 29 out of the 30-share Sensex ended higher with gains led by Jindal Steel that rose 8.74 per cent, followed by Tata Power,ICICI Bank and Bhel which rose 5-6 per cent each.
Similarly, the 50-share National Stock Exchange index Nifty spurted by 129.75 points, or 2.52 per cent to 5,278.90.
Sensex has gained nearly 550 points in the last four days coinciding with Prime Minister Manmohan Singh taking over charge of Finance portfolio and signalling speedy revival of the slowing economic growth.
Meanwhile, the rupee rebounded by 91 paise to trade at 55.89 against the US dollar, also aiding market sentiment. (MORE)