Besides, Prime Minister Manmohan Singh's comments that he was confident of the UPA government numbers in Parliament aided market mood.
"Yes, we are confident of numbers," Singh said after an hour-long meeting leaders of UPA which presented a united picture.
He was commenting on stalemate in Parliament over FDI issue leading to adjournment of Lok Sabha and Rajya Sabha for the fourth day in a row since the Winter Session began.
Buying was so strong that all the 13 sectoral indicesclosed with gains of 0.27-3.2 per cent. Of the BSE 30-stock index, Sensex, 28 scrips registered gains as only NTPC and ONGC closed with minor losses.
Sensex opened higher than the previous close and remained in the positive zone throughout before closing at 18,842.08 - up 305.07 points or 1.65 per cent.
The NSE 50-stock index, Nifty, shot up 91.55 points or 1.62 per cent to 2-month high of 5,727.45.
"Positive international cues and reaffirmation of stable outlook on India by Moody's sentimentally aided the rise in the markets," Inventure Growth & Securities, Head Research, Milan Bavishi said.
Moody's said today that the outlook on its Baa3 rating for India is stable, in part due to the country's high savings and investment rates.
Investor sentiment also got the boost following news thatGreece's official creditors, including the International Monetary Fund (IMF) and European Union, have agreed on a deal to lower the country's debt burden.
European markets opened in the green following the deal that will help Greece get nearly 44 billion euros (USD 57 billion) in aid to overcome debt crisis. Key indices in
France, Germany and UK were up 0.51-0.67 per cent.
Key indices in Japan, Singapore, Taiwan and South Korea were up between 0.25 per cent and 0.37 per cent, while Hong Kong and China markets were down.
Persistent capital inflows from foreign funds also boosted the market sentiment in India. FIIs bought shares worth a net Rs 163.14 crore yesterday as per provisional data from the stock exchanges.
The market movement was also impacted by investors squaring their positions ahead of the settlements in the derivative contracts on Thursday.
A sharp rise in heavyweight stocks such as ITC, HDFC Bank, HDFC, Infosys, RIL, Bharti Airtel and ICICI Bank together contributed nearly 225 points to the Sensex gains.
Bharti Airtel was the top gainer with a rise of 5.22 per cent, followed by Sterlite (3.56 pc), HDFC (2.79 pc), HDFC Bank (2.69 pc), Hindalco (2.55 pc), Cipla (2.53 pc), ITC (2.46 pc), Infosys (2.17 pc), Bajaj Auto (2.02 pc), Jindal Steel (1.87 pc), Dr Reddy's Lab (1.77 pc), RIL (1.66 pc), ICICI Bank (1.54 pc), Tata Motors (1.24 pc), Tata Steel (1.22 pc), BHEL (1.13 pc), SBI (1.02 pc) and L&T (0.78 pc).
Amongst the sectoral indices, the BSE-Realty flared up by 3.20 pc, Consumer Durables (3.18 pc), FMCG (2.12 pc), Bankex (1.84 pc), Teck (1.81 pc), Metal (1.36 pc), IT (1.24 pc), Oil & Gas (1.17 pc) and Capital Goods (1.01 pc).
Total market breadth was positive as 1,745 stocks closed with gains while 1,146 that finished with losses. The total turnover shot up to Rs 3,257.31 crore from Rs 2,401.96 crore yesterday.
The BSE and the NSE will remain closed tomorrow on account of "Gurunanak Jayanti".