Markets began the Diwali week with a bang with Sensex today surging 321.32 points, its biggest rise in over a week, to end at 26,429.85 buoyed by fuel reforms and hopes of Modi government going ahead with further economic initiatives after BJP's strong show in state polls.

Furthermore, positive overseas cues on the back of weekend rally in the US on upbeat earnings also bolstered the trading sentiments here. The Indian rupee also strengthened to 61.30 levels against US dollar.

The 30-share Sensex soared by 321.32 points, or 1.23 per cent, to close at 26,429.85 after touching the day's high of 26,517.90. It had gained 109.19 points on Friday. Today's rise was the best since 390.49 point jump on October 9.

On similar lines, the 50-share NSE Nifty after reclaiming the 7,900-mark, touched session's high of 7,905.50 but some profit-booking trimmed gains and it finally settled 99.70 points, or 1.28 per cent, at 7,879.40.

"Participants were optimistic from the early trade on hopes for additional reforms after Narendra Modi's party won election in one state and emerged as single largest party in the other. Additionally, measures taken by the government in the past two days, like deregulating diesel prices and raising the cost of natural gas also aided the sentiment," said Jayant Manglik, President-retail distribution, Religare Securities.

Stocks of state-owned oil marketing companies BPCL, HPCL and Indian Oil hogged the limelight and surged up to 7.38 per cent as diesel deregulation will sharply cut subsidy burden of these companies. Sensex constituents ONGC and GAIL ended in positive terrain with gains up to 5.44 per cent.

Bucking the trend, RIL shares ended 0.39 per cent lower as hike in gas price was lower than expected, traders said.

Auto space stocks also displayed a firm trend on expectations of higher sales on account of ongoing festive season and hopes diesel deregulation will fuel demand for vehicles. Major gainers were Tata Motors, Mahindra and Mahindra, Hero MotoCorp, Maruti Suzuki and Bajaj Auto.

Overall, 25 of the 30 Sensex stocks gained, while five ended lower led by Infosys, TCS, Wipro and ITC Ltd.

Shares of Jindal Steel and Power Ltd tumbled 8.58 per cent after a case of alleged cheating and corruption has been registered by CBI against the company relating to the probe into coal blocks allocated during 1993-2005 period.

Sectorwise, Auto index rose the most by 2.17 per cent, followed by Oil & Gas index 1.94 per cent, Capital Goods index 2.14 per cent, Banking index 1.78 per cent, Metal index 1.57 per cent and Healtchare index 1.23 per cent.