The 30-share BSE index zoomed 634.61 points or 1.55 per cent to close at 41,452.35. During the day, it jumped 664.38 points to 41,482.12.
Led by the rally in the markets, market capitalisation (m-cap) of the BSE-listed companies advanced Rs 2,25,554.62 crore to Rs 1,57,06,155.38 crore.
US President Donald Trump on Wednesday said that no Americans were harmed in the attack by Iran on US bases in Iraq as he offered to "embrace peace" with the Iranian leadership, in a significant move to de-escalate spiralling tensions in the Middle East.
"It turned out to be a phenomenal day for the equity markets as the benchmark rose over one-and-a-half per cent. A sharp decline in crude and strengthening of the rupee further added to the buoyancy," Ajit Mishra, vice-president (research), Religare Broking Ltd, said.
From the 30-share pack, 26 companies closed with gains where ICICI Bank was the top gainer among the Sensex constituents, rallying 3.80 per cent, followed by State Bank of India, Mahindra and Mahindra, IndusInd Bank, Maruti Suzuki, Asian Paints and Reliance Industries.
"Expectation for initiatives to bring growth in the upcoming Budget and easing tensions in the Middle East seem to cheer investors. The government is poised to bring initiatives and policy measures to support the economic growth to benefit equities for long term. Meanwhile, the short-term market trend will be driven by events like third quarter results," Vinod Nair, head of research, Geojit Financial Services, said.
Brent crude oil futures rose 0.40 per cent to USD 65.70 per barrel.
During intra-day, the rupee appreciated 26 paise to 71.43 per US dollar.
In the broader market, the S&P BSE Midcap Index gained 1.51 per cent and Smallcap 1.55 per cent.
On the BSE, 1,820 companies advanced, while 752 declined and 208 remained unchanged. SUM HRS