A recovery in the rupee and positive cues from European markets also buoyed trading sentiments, brokers said.
After touching a low of 26,220.49 points in early trade, the 30-share Sensex bounced back to close higher by 157.96 points, or 0.60 percent, at 26,626.32. Intra-day, it touched a high of 26,721.03.
The gauge had lost 738.38 points in the previous three sessions in line with weak global cues and the Supreme Court's verdict on coal block allocations.
The 50-share Nifty of the National Stock Exchange also recovered by 57 points, or 0.72 percent, to close at 7,968.85 after shuttling between 7,841.80 and 7,993.30.
Sentiments turned better with banking stocks leading a rebound after S&P upgraded India's credit rating outlook to 'stable' from 'negative'.
Buying in metal and healthcare counters on the first day of October month series in the derivatives segment also aided the sentiment, brokers said.
SBI rose by 2.71 percent, Axis Bank by 3 percent, ICICI Bank by 0.76 percent and HDFC Bank by 2.35 percent, helping key indices to rebound from one-month lows.
Metal stocks, which were badly beaten in the past two sessions, staged a strong comeback on value buying.
Hindalco gained the most by surging 5.25 percent, Tata Seel by 3.10 percent and Sesa Sterlite by 0.49 percent. Jindal Steel and Power rebounded 5.20 percent.
Other bluechip gainers included Sun Pharma, Cipla, Mahindra and Mahindra, Tata Motors, RIL, ONGC and Wipro.
Laggards were Dr Reddy, Bajaj Auto, Bharti Airtel, GAIL, Hero MotorCorp, Hind Unilever and ITC that slumped up to 2.69 percent.
In the 30-Sensex constituents, 19 ended higher, while 11 remained in the negative terrain.
The BSE Metal index gained the most by surging 2.49 percent, followed by Realty 2.27 percent and PSU index by 2.19 percent.

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