The Sensex ended at a new high of 26,420.67, up 29.71 points or 0.11%, and the Nifty closed at a record 7,897.50, up 23.25 points or 0.3%. The BSE Mid-cap and Small-cap indices gained more than 1% each.
Foreign portfolio investor (FPIs) were net buyers of $93 in the cash segment, showed provisional data from stock exchanges. Foreign funds have purchased about $550 million in the last five sessions, and the tally stands at nearly $12.5 billion so far in calendar 2014.
Key Asian indices the Nikkei 225, Hang Seng, Taiwan's Taiex and Kospi ended up nearly 1% on Tuesday on improved risk sentiment amid easing of tensions in the Ukraine crisis.
Major European indices the FTSE 100, CAC40, DAX, IBEX were trading up 0.5-1% at the time of going to print. US futures were up 0.8-1.2%.
Foreign ministers from Russia, Ukraine, Germany and France gathered in Berlin over the weekend to discuss a political solution to the crisis and Russia's foreign ministry said on Monday a certain progress was achieved during the talks.
Ukrainian forces reported new successes overnight, building on a weekend breakthrough, when troops raised the national flag in Luhansk, a city held by pro-Russian separatists since fighting began in April.
Experts said the Street's focus is shifting toward the US Jackson Hole event from the geopolitical tensions in Iraq and Ukraine.
Asset markets look at this event very closely for Feds hint on inflection points in monetary policy. Understandably, with a strong US economy and steady improvement in labour market conditions, there is palpable tension that Janet Yellen may use this event to forewarn markets about a possible turn in monetary policy, said Abhay Laijawala, head of research, Deutsche Equities India.
The US Federal Reserve is scheduled to hold its annual Jackson Hole economic symposium from August 21-23.
According to R Sreesankar, head, institutional equities, Prabhudas Lilladher, the feel-good factor is back and has resulted in the stock indices reaching a new high.
Back home, market breadth was strong with 19 out of Sensex-30 companies ended in the green on Monday. In all, nearly 1,700 stocks gained against 1,300 stocks that ended in the red.
Ten out of 12 sectoral indices ended positive. BSE Auto was the top gainer on Tuesday. The gauge tracking key Indian auto makers rose more than 2%, led by M&M (3.67%), Tata Motors (2.95%) and Bajaj Auto (2.46%).