The BSE Sensex rose as much as 1.9 percent on Monday, with index heavyweight Reliance Industries and banking stocks leading the gains, as investors grew optimistic about renewed efforts by European leaders to limit the region's debt crisis.

European Union leaders appeared closer on Sunday towards a plan to contain the euro zone's sovereign debt crisis, nearing agreement on bank recapitalisation and leveraging their regional rescue fund.

The market is up today because investors expect European leaders to reach a solution on Wednesday...once that is solved, money will again get distributed in different asset classes, said Deven Choksey, managing director at KR Choksey Securities.

The EU will take a final call on strategy to fight the euro zone's sovereign debt crisis on Wednesday, but sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.

Investors also shrugged off the possibility of an interest rate increase by India's central bank on Tuesday when it meets to review policy.

Top lender State Bank of India rose 1.4 percent, while No. 2 player ICICI Bank gained 2.2 percent. The sector index rose 1.8 percent.

There are two negative sentiments, one that RBI may raise rates again, and two that rupee may depreciate further, Choksey said.

However, sentiment for banking stocks was positive on the finance minister's comments last week that an adequate amount will be provided for capitalisation of SBI and other state-run banks, he said.

At 10:50 a.m. (0520 GMT), the main 30-share BSE index was up 1.6 percent at 17,054.17 points, with three of its components in the red.

The 50-share NSE index was trading up 1.6 percent at 5,130.90 points. In the broader market, there were about three gainers for every loser on a volume of about 131.5 million shares.

Reliance Industries, India's top listed firm with the highest weightage to the index, rose 1.7 percent to 849.70 rupees.

Airline stocks rose, after local media reports that India will shortly consider a proposal to allow foreign airlines to pick up stakes in cash-strapped domestic carriers.

Kingfisher Airlines gained 2.2 percent, while Spicejet rose 3.4 percent. Jet Airways, India's largest carrier by market share, rose 2 percent to 237.35 rupees.

The MSCI's measure of Asian markets other than Japan was up 3.3 percent and Japan's Nikkei gained 1.6 percent.

STOCKS ON THE MOVE

* Polaris Software rose 8 percent after it raised its revenue outlook for 2012 to between 20.1 billion and 20.6 billion rupees from between 19.68 billion and 20.14 billion rupees on Saturday.

* Paint maker Akzo Nobel India Ltd fell 9 percent after its parent Akzo Nobel NV abandoned its 2011 core profit guidance and said it would cut 500 million euros ($690 million) of costs, in a bid to offset higher raw material prices and as softening demand spread to China.

* Blue Star fell 5.5 percent after it reported a loss for July-September.

MAIN TOP 3 BY VOLUME

* Vaswani Industries Ltd on 5.9 million shares

* Tata Motors on 5.2 million shares

* Suzlon on 4.3 million shares