Continuing foreign capital inflows and a firm trend in overseas stock markets also supported the index, which gained for the fourth straight session.
Infosys, which rose 4.79 per cent, and ICICI Bank boosted the Sensex as 20 of the 30 shares on the index advanced. IT stocks led seven of the 13 sectoral indices higher, including banks, capital goods and realty.
The S&P BSE Sensex opened 263 points higher and dropped to the day's low of 20,368.06. A surge in the last hour took the index to the day's high of 20,559.69 before it ended the day at 20,528.59, a gain of 255.68 points or 1.26 per cent.
"Sentiment was boosted by positive global markets which recovered as investors hoped the US will soon reach some conclusion regarding government shutdown," said Rakesh Goyal, senior vice president at Bonanza Portfolio Ltd. "Better than estimated Infosys second quarterly results for FY14 also added to the markets' strength."
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The CNX Nifty on the National Stock Exchange rose 75.25 points, or 1.25 per cent, to 6,096.20. The SX40 on the MCX Stock Exchange closed at 12,217.87, a gain of 138.72 points.
The company posted a 1.6 per cent increase in consolidated net profit to Rs 2,407 crore for the second quarter ended September 30.
Overseas investors bought a net Rs 614.27 of shares yesterday, according to provisional stock exchange data.
Asian and European stocks were up on hopes that US lawmakers will lift the debt limit and avoid a default. Key indices in China, Hong Kong, Singapore, Japan, South Korea and Taiwan rose.