The benchmark S&P BSE Sensex ended 28 points higher on Tuesday, staging a dramatic recovery after plunging more than 500 points in intra-day trade, as the rupee rebounded from a new low against the dollar.
The gains were led by IT, metal and teck sector stocks, while public-sector and consumer durable shares fell.
Initially, market sentiment was weighed down after US stocks closed lower yesterday and key Asian indices fell amid indications of military action against Syria for its alleged use of chemical weapons against civilians.
Investors were also concerned about the Food Security Bill's subsidy burden and capital outflows with the likely tapering of bond buying by the US Federal Reserve next month.
The rupee recovered some ground after falling to a new lifetime low of 68.75 against the dollar as oil prices rose on concern about the possible military action against Syria.
Higher oil prices increase India's import bill and put pressure on the current account deficit.
The 30-share Sensex opened at 17,851.44, lower than yesterday's close of 17,968.08, and plunged almost 520 points to the day's low of 17,448.71.
As the Indian rupeerebounded, value-buying set in to help the index erase the day's losses and climb to 18,101.84 before ending at 17,996.15, a gain of 28.07 points, or 0.16 per cent.
"We feel that the tension of Syria is temporary in nature but the overall sentiment is too weak and might help bears to take the advantage of it," said Shrikant Chouhan, head of technical research at Kotak Securities.
Life Insurance Corporation (LIC), the country's biggest institutional investor, was said to have bought shares. Stocks also recovered as investors covered their pending long positions created in the recent bear run ahead of the monthly derivatives contract expiry on Thursday, brokers said.
The broader Nifty index on the National Stock Exchange also recovered from its initial sharp fall, although it closed down by 2.45 points at a 13-month low of 5,285. The SX40 on the MCX-SX ended flat at 10,630.05.