The market was already in the buy mode on account of the sops announced for the information technology sector by finance minister Yashwant Sinha on Wednesday. News of a further dilution in sanctions fuelled a rally led by infotech stocks on the bourses.

Massive buying in shares of HLL, MTNL, Bhel and ITC also contributed to the rally. Provisional figures collated by the NSE show that foreign institutional investors (FIIs) and domestic mutual funds were net sellers at Rs 9.82 crore Rs 4.16 crore, respectively. On the BSE, FIIs were reported to have made huge purchases. On Wednesday, even though the Sensex lost 5 points, FIIs were net buyers at Rs 24 crore.

"It has become very difficult andhazardous to predict about the markets these days as there are a large number of extraneous developments which are too overwhelming. If the sanctions are not lifted then the World Bank-aided projects of power and coal sectors will get stalled, again leading to a fall on the markets and if they are lifted the markets will move northwards again," said Shailesh Merchant Brokers, vice president, Dilip Bhat.

"There was only one way buying on the bourses with the sentiment being quite positive. From today's levels the index might go up by another 50-odd points after which it is slated to move down on profit-booking," said Chetan Shah of Asian Market Securities.

Morgan Stanley AMC was rumoured to have bought 3.5 lakh to 4 lakh shares of ITC. The offshore fund of Canbank was reported to have bought 60,000 shares of Castrol. It had bought 1.7 lakh shares of L&T on Wednesday. Other FIIs who were reportedly buying were Schroders and Capital International at the counters of Infosys, P&G, HLL, Cadbury's and Tata Tea.DBS Securities was reported to have bought Satyam Computers.

UTI was also reported to be buying selectively, mainly in B-group shares. Domestic mutual funds and financial institutions together with operators picked up a lot of pivotals.

Market participants also attributed the rise to the strengthening of the Asian markets and likelihood of an appreciation in the value of the rupee in the wake of the sanctions being lifted.

"As soon as the market touches higher levels UTI is going to sell as it had provided major support to the market earlier. When the Sensex touches 3,500 to 3,600 points, UTI will book profit, pulling the Sensex down," said BSE broker Ajai Doshi.

Almost all software companies hit the upper limit of the circuit. Satyam Computers gained 7.17 per cent to close at Rs 548.75 with 34.9 lakh shares changing hands. Pentafour Software hit the circuit at Rs 811.50. NIIT gained 3.3 per cent to close at Rs 1,536.50, BFL hit the circuit at Rs 446.25, Digital Equipment hit the circuit at Rs 150.70while DSQ Software hit the circuit at Rs 262.90.

Stocks such as Bhel, MTNL, Rolta, Zee Telefilms, Cadbury's, Essel Packaging and Orient Information also hit circuits. MTNL shares moved up on news that the Department of Telecommunications had permitted it to operate cellular services in Delhi and Mumbai. Index heavyweight HLL also gained a massive 4.5 per cent to touch a new of Rs 1,709.75.