In volatile trading, the benchmark index surged over 291 points at midsession on the Bombay Stock Exchange on Wednesday on emergence of buying by funds amid brokers covering their short positions.
The key index moved in a wide range of 14,280 and 13,870 points on heavy alternate bouts of trading in fundamentally strong stocks led by heavy-machinery and information technology company stocks.
The Sensex gained 291.22 points at 14,280.33 at 1300 hours, while the wide-based National Stock Exchange's Nifty gained 87.50 points at 4,162.40. The Nifty had fallen to 4,040.15 in morning deals.
The Sensex had plunged 438 points on Tuesday on political developments over the nuclear issue after the last week's bearish trend over widening sub-prime mortgage problems in US markets.
"The fresh firmness in the market came on speculations that the US Federal Reserve cutting the discount rate might help the market to defuse a crisis in the credit markets and revive demand for riskier assets like equities, Mumbai-based broker Ratnesh Gupta said.
Asian stocks rose on the back of rebound in US stocks for the fourth day on Tuesday, giving positive signals to the Indian markets, even discounting the political crisis at home, Gupta said.
Reliance Industries, which has the world's third biggest refinery and is the heaviest on the Sensex, jumped Rs 8.15, or 0.5 per cent, to Rs 1,755.5.
Infosys Technologies rose Rs 10, or 0.6 per cent, to Rs 1,771. India's second-largest software exporter expanded into Latin America by setting up a software development and sales unit in Monterrey, Mexico. These two companies carry almost one-fifth of the total weightage on the Sensex.