Sensex rises 1.9 pct on possible end to rate hikes

"On top of that, global markets have rallied recently, and there is good news expected from Europe. Indian markets have joined in the positive sentiment."

The main 30-share BSE index closed up 1.86 percent at 17,254.86 points, its highest close since Aug. 5. Only three of its components closed in the red.

India's stock markets will open for a 90-minute special trading session on Wednesday at 1100 GMT. The markets will be closed on Thursday on account of the annual Diwali holiday.

European policymakers appear to be inching towards a deal on bank recapitalization and rules for using the European Financial Stability Facility (EFSF), driving gains for India's IT stocks for a second consecutive day.

The country's flagship IT sector has been looking to increase its sales in Europe, its second-largest export market, to hedge against U.S. exposure.

Infosys, India's second-largest software services firm, and a bellwether of the country's $76 billion IT industry, closed up 3.3 percent at 2,858.70 rupees ($57.38), having risen as much as 4.8 percent.

Tata Consultancy Services, the market leader, closed up 1.8 percent at 1,098.65 rupees, with rival Wipro ending the day at 372.15 rupees, a gain of 3.9 percent.

Automakers, who have been hit with a slowdown in demand over the past quarter caused by the high cost of borrowing, saw their shares rise after the central bank said in a statement the likelihood of a rate move in December is "relatively low."

Maruti Suzuki, India's largest carmaker, closed up 3.5 percent at 1,151.25 rupees, with rivals Mahindra & Mahindra and Tata Motors posting gains of 5.4 percent and 3.0 percent respectively.

Banking stocks, the biggest contributor to the benchmark Sensex index, fell as much as 3.1 percent after the Reserve Bank of India (RBI) deregulated savings bank deposit rates alongside the widely expected 25 basis point hike.

Larger banks are likely to be the hardest hit by the deregulation, Deutsche Bank said.

HDFC Bank and State Bank of India, the country's largest lender, were the biggest percentage fallers in the benchmark index. HDFC closed down 3.4 pct at 468.00 rupees, while SBI slipped 3.6 percent to end at 1,839.80 rupees.

The 50-share NSE index closed up 1.83 percent at 5,191.60 points, slightly below its session high. In the broader market, roughly the same number of stocks gained as fell, on a volume of about 664.4 million shares.

At 1007 GMT, the FTSEurofirst 300 index of top European shares was up 0.10 percent. World stocks, as measured by the MSCI world equity index were up 0.16 percent.

STOCKS ON THE MOVE

* Shares in non-ferrous metals producer Sterlite Industries, a unit of London-listed Vedanta Resources, rose as much as 5.2 percent, buoyed by a continued rise in Shanghai copper futures.

* Titan Industries fell as much as 6.7 percent after the company reported a lower-that-expected 16 percent rise in its September-quarter net profit at 1.48 billion rupees.

* Shares of Dr.Reddy's Labs rose as much as 3.0 percent after the U.S. Food and Drug Administration approved its generic version of Zyprexa medicine, and its second-quarter net profits beat expectations.

MAIN TOP 3 BY VOLUME

* HDFC Bank on 20.7 million shares

* Unitech on 16.5 million shares

* TATA Motors on 16.4 million shares

(Reporting by Henry Foy; Editing by Aradhana Aravindan)