The BSE benchmark index, which had gained 200 points in the previous session, shot up further by 304.99 points, or 1.81 per cent to 17,143.68, the level last seen on July 20.
Sensex's gains, the biggest single-day rise in over a month, were largely driven by ICICI Bank, Infosys and L&T. SBI topped the buying list rising 4.63 per cent today, followed by Tata Motors and Tata Power that rose 4.1 per cent each.
ICICI Bank, Bhel, L&T, GAIL and Sterlite rose in the 3-3.9 per cent range. In the 30-share index, 27 scrips rose.
Marketmen said after opening 80 points higher tracking poistive cues from Asian markets, Sensex kept on rising higher as sentiment firmed up on speculation European Union policy makers will take action to ease the region's debt crisis.
Blue chips ITC and Reliance that gained over 1 per cent each supported the market mood. Overall in the market, over 1,600 stocks closed higher while 1,143 scrips ended lower.
There were faint hopes that the RBI may announce some measures at its policy meeting tomorrow, said dealers.
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"RBI may respond by releasing more liquidity by Cash Reserve Ratio or 0.25 per cent cut but expectations are very low," said Raamdeo Agrawal, Joint MD, Motilal Oswal Financial Services.
Traders also said FIIs, who have pumped in over Rs 8,400 crore in July so far, also bought shares today in large caps and mid cap stocks.
The 50-share National Stock Exchange index Nifty rose by 99.95 points, or 1.96 per cent to 5,199.80, after touching the day's high of 5,206.60.
Meanwhile, the rupee was trading at 55.42 from its previous close of 55.33 on the back of heavy dollar demand from oil firms.