The gains were led by a surge in ICICI Bank and helped by rallies in overseas markets after policy makers around the world took new and drastic steps to rescue banks and prevent the global economy from sinking into recession.

However, doubts remained about the strength of the rise.

No. 2 lender ICICI Bank rose 16.8 per cent to 425.30 rupees, having risen nearly 25 per cent earlier, helped by the finance minister's comments the government was working to improve liquidity in the banking system and after its chief executive said on Monday deposits with the bank were safe and it had a cushion to take domestic and overseas shocks.

ICICI has been hammered by investor concerns about its exposure to the global crisis. Before Monday's surge, its shares had fallen more than 70 per cent in 2008.

The 30-share BSE index ended up 7.64 per cent, or 804.38 points, at 11,332.23, its biggest per centage rise since May 18, 2004, as it pared some of the previous week's fall of nearly 16 per cent. All but two of its components gained ground.

"It's a temporary pullback rally, triggered by the positive international markets and the reassurance from the finance minister about the liquidity situation in the country," said Gajendra Nagpal, chief executive of Unicon Financial.

Finance Minister Palaniappan Chidambaram said on Monday the government, the central bank and the stock market regulator were coordinating on an hourly basis regarding the fallout of the global financial crisis on the Indian market.

Traders said the statement led to speculation the regulator would take measures such as banning short-selling, the selling of borrowed shares in the hope the price will fall and then buying them back more cheaply to make a profit, to stem the slide.

Mumbai brokerage India Infoline said it was not convinced the correction in India's markets had ended and advised investors to stay on the sidelines till global markets stabilised.

"The turmoil in the global credit markets is still far from over, and it's possible that FIIs would continue to stay away from emerging markets for some time to come," it said, referring to foreign institutional investors.

"One should not get carried away if there is any kind of a bounce back, as further selling is expected."

Foreign funds have sold a net $10.3 billion in Indian stocks in 2008, and the index is down more than 44 per cent this year. In comparison, they bought a record net $17.4 billion in 2007, helping lift the benchmark 47 per cent.

Shares in Tata Consultancy Services ended up 12.6 per cent at 589 rupees after India's largest software services exporter said it had signed an outsourcing deal worth 10 billion rupees with the Indian government.

Reliance Industries, India's most valuable listed firm, rose 3.1 per cent to 1,574.20 rupees and second-largest outsourcer Infosys Technologies closed up 7.2 per cent at 1,315 rupees on short covering, traders said. The two stocks account for more than 23 per cent of main index.

In the broader market, 1,689 gainers outpaced 948 losers on volume of 271 million shares.