Markets advanced 3%, snapping four sessions of losses as risk appetite returned on expectations that European officials will be able to contain the euro-zone debt crisis.
The Sensex soared 473 points to 16,524 and the Nifty too gained 136 points, at 4,971.
Markets commenced the day on an upbeat note after a rally in Asian markets on expectations that European officials would mull a special purpose vehicle to buy bonds issued by the Euro-zone countries suffering from the debt crisis.
Bourses in Europe also jumped during opening trades which helped sustain the gains.
The Rupee also strengthened on Tuesday to Rs 49.2 tracking
firm equities. "Softening of dollar-rupee rates in the coming sessions could trigger further buying in equities," said Amit Chheda, head of equity investments from Inventure Growth and Securities.
Analysts, however, said the current rally was a just a relief rally and Nifty would face resistance around 5000 levels.
"For the week, if the index sustains above 4870, it is positive, but I expect this bounce to fade around 5000-5025 level," said Sahaj Agrawal, Associate Vice President - Derivatives from Kotak Securities.
In Asia, the Nikkei Stock Average rallied 3%, Hang Seng index jumped over 4% and the Shanghai Composite advanced 0.9%. In Europe, the CAC 40 index, the FTSE 100 and the DAX advanced between 3-4% each.
