Markets rebounded almost 3per cent on back of positive news from Europe and short covering in the frontline stocks.

The Nifty ended up 137 points, at 4,888 and the Sensex advanced 440 points, at 16,232.

Markets played a catch up after the holiday and made a gap up opening, tracking gains across global markets as Eurozone pledged to shore up banks, easing concerns of wide spread default.

Buying in frontline stocks -- Reliance Industries, ICICI Bank and Larsen & Tourbo -- helped the Sensex sustain the gains.

Steps taken by the European Central Bank to ease pressure on struggling banks boosted markets across Asia.

The Nikkei Stock Average ended up 1per cent, Hang Seng added 3per cent, but Shanghai Composite bucked trend and ended down 0.3per cent.

In Europe, the markets succumbed to some profit booking after positive start on reports of Moody's downgrading of 12 financial institutions and 9 Portuguese banks.

The FTSE 100 and the CAC 40 declined 0.6per cent, while the DAX slipped 0.5per cent.

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Back in India, Analysts said that the bounce on Friday was merely a relief rally as the markets were extremely oversold after the correction.

Dipen Shah, Head of Fundamental Research from Kotak Securities said, "Markets will take cues from more economic data from US and Europe.

Domestically, IIP data for August will also be closely watched.

The quarterly results season will also be very important, especially in the backdrop of the weak economic situation.

"We recommend a bottoms-up approach." Technical analysts said that Nifty may rally till 5,036 levels around Diwali.

IT bellwether Infosys will kick start second quarter results season on 12th October.

Analysts expect muted growth in the second quarter due to rising interest costs.

ICICI Securities expects year-on-year revenue growth at 21.3per cent and sequential growth at 2.1per cent ex BFSI (Banking and Financial Services).

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On the macro front, food inflation advanced to 9.4per cent and fuel price index climbed to 15per cent in the year to September 24.

Food inflation has remained high, around 9per cent for past few months due to growing demand for high protein diet.

Credit Suisse in the Research note said, "We continue to expect the Reserve Bank of India to hike rates one last time on October 25.

"Weakening Rupee is likely to put upside pressure on inflation." The RBI has hiked rates 12 times since March 2010.

Among the Sensex stocks -- Reliance Industries, up 5per cent, ICICI Bank, up 6per cent and Larsen & Tourbo, up 4per cent lifted the Sensex by nearly 160 points.

Hero Motor Corp, Tata Power and ONGC ended in the red, down marginally.

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Among individual stocks -- Bharti Airtel slipped 3per cent and Idea Cellular dipped 5per cent on reports that the department of telecommunication has asked its legal wing to examine the 3G roaming agreements between Bharti Airtel, Vodafone and Idea Cellular.

Gains were also visible most metal stocks. Sterlite Industries rallied 9per cent, followed by Jindal Steel and Hindalco, up 8 and 5per cent each.

Bargain buying in State Bank of India, Axis Bank and Kotak Mahindra Bank, up 2 – 5per cent has pulled up the banking index.

From the broader markets -- the midcap and the smallcap indices advanced over 1per cent each.

The market breadth was positive, as 1802 stocks advanced for 984 declining stocks.