Indian share prices surged on Thursday to close 6.9% higher, marking their highest ever single-day rise.
The Sensex has lost almost 25% of its value since May 10
Bargain-hunting traders and foreign investors bought shares after three days of heavy losses on the market, regaining some of the lost ground.
Dealers said that the strongest gains came among motor manufacturers and producers of consumer goods.
The Bombay Stock Exchange's benchmark exchange, the 30-share Sensex index rose 615.62 points to 9,545.06.
Overseas money had helped the market's momentum, said Vijay Tilakraj, senior dealer with brokerage Prabhudas Lilladher.
"This was completely unexpected, but a welcome relief after the carnage," he added.
Motorbike and scooter maker Bajaj Auto and cement manufacturer Grasim led the way, both gaining 14%.
Indian shares have fallen sharply since 10 May, when the benchmark index reached a record high of 12,612 points.
The markets have been volatile, having surged last Friday by 5.5%, only to lose ground again on Monday, Tuesday and then Wednesday, when it closed below the 9,000-point mark.
Analysts believe that volatility will continue until there is more clarity about the state of global growth and the direction of interest rates in the US - the world's biggest economy.
Market analyst Hemen Kapadia, of investment advisers Morpheus Incorporated, expects the Sensex to bounce back.
"The fundamentals of the Indian economy haven't changed," he said.
"It is still expected to grow at 7 to 8%, domestic companies are performing well and I think people have realised the sentiment was bearish without reason. Investors seem to be coming back to the markets."
However, director of Ashwin Chinubhai brokers, Anand Dalal believes the underlying sentiment in the markets is still "very cautious".
"It was not an India-specific problem, but external issues, such as the meltdown in global markets and the US increasing its interest rates, that led to the fall in the Indian markets," he said.
"Investors do not believe the market has bottomed out and will hesitate to take any steps until they get a clearer picture of which way the Sensex is headed."