Reliance Communications rose 6.2 per cent to 440.95 rupees, its best close since June 30, after South Africa's MTN and the No. 2 Indian mobile firm said they had agreed to extend their exclusive talks for a tie-up.

Financial stocks led by No. 2 lender ICICI Bank rebounded, as investors expected the drop in oil prices would ease the pressure on the central bank to tighten policy.

"Two of the biggest worries for the market seem to be settling," said Nikunj Doshi, investment manager at Envision Capital. "Oil is easing and political uncertainty is almost over."

Oil was trading above $137 a barrel after falling more than $5 on Tuesday.

The benchmark 30-share index jumped 614.61 points to 13,964.26, its highest close since June 26, with all its components rising.

Merrill Lynch said the withdrawal of communists from the ruling coalition would enable quicker economic reforms.

"This could come in the form of disinvestments, a hike in foreign limits in sectors such as insurance, allowing FDI in retail," it said in a note.

A regional party, whose support appears crucial for the survival of the government, said on Tuesday it would not be "rigid" on economic issues but wants a mechanism through which it can influence policy making.

The communist parties that have provided India's government with a parliamentary majority for four years said on Tuesday they were withdrawing their support to protest a civilian nuclear energy deal with the United States.

However, it may be too early to call a full trend reversal in a market that has fallen nearly a third this year, with high inflation and firmer interest rates expected to crimp consumer spending and corporate earnings.

"The bear market may not be over but some relief could be on the way. We believe a 10-15 per cent rally is perfectly plausible," Morgan Stanley said.

In the broader market, gainers led losers four-to-one on volume of 335 million shares.

Top private firm Reliance Industries gained 5.1 per cent to 2,079.95 rupees, after falling 3.5 per cent in the previous two sessions.

Bellwether Infosys Technologies rose 4.9 per cent to 1,821.10 rupees on speculation the No. 2 software services exporter would raise its full-year revenue outlook when it releases results on Friday.

ICICI rose 4.7 per cent to 621.90 rupees as investors bought into beaten down bank stocks that have lost more than half their value in 2008. The BSE Bank index closed up 4.9 per cent.

Reliance, Infosys and ICICI constitute nearly a third of the the weightage of the main index.

MTN and Reliance Communications, which is controlled by billionaire Anil Ambani, said they extended the deadline for exclusive negotiations to July 21.

The original deadline had ended on Tuesday. Reliance Communications had risen as much as 9.3 per cent during the day.

"The extension of talks is a sign that both sides are serious about a deal," said Nishna Biyani, telecom analyst at brokerage Prabhudas Lilladher. "That's good news for shareholders."

The two firms had started talks on May 26 that could create a top-10 telecom group, but a claim by Mukesh Ambani, the estranged elder brother of Anil, and a 27 per cent fall in Reliance Communications shares were seen as obstacles to a deal.

The 50-share NSE index rose 4.2 per cent to 4,157.10 points.