The BSE benchmark index, which had lost 60 points in last two trading sessions, shot up by 215.03 points, or 1.25 per cent to end at 17,412.96, its highest closing in four weeks.
Sensex' gains were led by RIL, which notched up its best daily performance in three years, ahead of a crucial meeting of an oversight panel to consider clearing annual investment plans for KG-D6 block. Private banks, including HDFC bank and ICICI Bank, also rose today, helping Sensex extend gains.
Metal stocks and auto stocks also attracted investors today with the sentiment being positive throughout the day.
Investor wealth across the market rose by nearly Rs 48,000 crore as nearly 1,676 scrips gained.
Before the markets closed for the day, Finance Minister P Chidambaram said the government will modify policies to regain investor confidence, besides unveiling a path of fiscal consolidation.
Brokers said sentiment improved on firming global trend influenced by higher-than-forecast US jobs data at 163,000 for July that came out on Friday after Indian markets closed.
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"Strong buying action was seen in the Reliance group stocks. RIL has seen a prolonged phase of price consolidation and today's rise comes as a welcome respite for long-term investors in the stock," said Milan Bavishi, Head Research, Inventure Growth & Securities.
However, pharma scrips like Dr Reddys and Sun Pharma, and FMCG stocks including ITC and HUL finished swith losses as investors moved money out of defensive sectors, said dealers.
The 50-share National Stock Exchange index Nifty shot up by 66.85 points, or 1.28 per cent to 5,282.55.