The NSE barometer Nifty also soared over 111 points to close at 8,395.45.
Capital goods, power, realty and metal shares saw heavy buying after an HSBC survey said India's manufacturing sector grew at its fastest pace in two years in December 2014.
From the banking and financials space in Sensex, counters like HDFC, ICICI Bank, HDFC Bank, Axis Bank and SBI rose.
Bank of Baroda, Bank of India, Bank of Maharashtra and United Bank of India gained among PSU banks outside the index.
"Banking sector rallied for the day with the hopes of some pro-industry outcome from the two-day conclave in Pune," said Rakesh Goyal, Senior Vice President, Bonanza Portfolio.
M&As are not the only way for consolidation in public sector banks, as creating a mechanism for easier access to capital would also improve their balance sheets, Financial Services Secretary Hasmukh Adhia said today on the inaugural day of the two-day 'Gyan Sangam', retreat of bankers.
Momentum ahead of December quarter earnings with Infosys results on January 9, also boosted sentiments, traders said.
The 30-share barometer Sensex spurted 380.36 points, or 1.38 percent, to close at 27,887.90, its strongest closing in over three weeks. Intra-day, it touched a high of 27,937.47. The index has now gained over 679.29 points in six straight sessions. On a weekly basis, the Sensex climbed 646 points.
Similarly, the Nifty after reclaiming the 8,400-mark to touch the day's high of 8,410.60, finally settled with a gain of 111.45 points, or 1.35 percent, at 8,395.45.
Sectorally, BSE Capital Goods index gained the most by rising 1.67 percent, followed by Banking 1.66 percent, IT 1.20 percent, Power 1.17 percent, Realty 0.91 percent, Metal 0.90 percent and Auto 0.71 percent.
Buying activity also extended to the midcap and small cap stocks. Midcap index ended 0.86 percent higher and small cap index gained 0.74 percent.
Foreign Portfolio Investors (FPIs) had bought shares worth Rs 18.20 crore yesterday, as per provisional data.

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