The 30-share Sensex, which had lost over 81 points at the outset, bounced back in late trade by 135.93 points, or 0.80 per cent to close at 17,032.56, a level last seen on May 3.
Dealers said with 25 stocks closing with gains in Sensex, the index entered the positive zone in the last one hour led by good buying in realty, banks and capital goods.
The rally in Sensex was led by ITC, ICICI Bank, L&T and SBI stocks with each jumping by 2-3 per cent.
Brokers said the market recovered sharply after crude oil (Brent) prices dropped to an 18-month low of USD 91 per barrel in global markets improved the sentiment while JPMorgan's upgrade supported the buoyant mood.
US-based JP Morgan upgraded Indian stock market to 'overweight' citing "lower oil price helps the current account deficit" economies including India.
A drop in fuel costs also improves inflation outlook because India imports 80 per cent of its crude requirements.
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Similarly, the 50-share NSE index Nifty fell to 5,093.45 before recovering to close higher by 44.45 points, or 0.87 per cent to 5,165.
The upsurge was further supported as speculators rushed to cover pending positions amid a surprise rise in stocks as investors bought bluechips.
Investors seemed to have ignored the rupee hitting a record low of 56.57 and was last trading at 56.4 levels against the dollar.
However, the rising trend in stocks was capped following a steep 2.6 per cent fall in index heavyweight Reliance Industries after its Canada-based partner Niko Resources said KG-D6 gas block holds 80 per cent less reserves than earlier estimated.