The market shot up in what market watchers hope is a sign investors are over their jitters caused by the US flagging a cut to its stimulus program.
The benchmark S&P/ASX 200 Index was up 72.2 points, or 1.5 per cent, at 4881.7. The broader All Ordinaries was up 68.9 points, or 1.44 per cent, at 4866.5.
The market has recovered all of the heavy losses incurred in the three days after the US Federal Reserve indicated it might soon begin withdrawing stimulus measures. That was a sign people were becoming more accepting and forgiving of the idea that bond buying to stimulate economies could stop, IG market strategist Chris Weston said.
"If the Fed is coming out of the market, maybe it is coming out for a reason and they see growth that is based on organic growth," he said. "It seems equities have got their mojo back."
The best performers were the banks and miners, which represent about half of the market. Westpac shares were up 61¢ at $28.95, NAB gained 55¢ to $29.42, ANZ added 53¢ to $28.66 and Commonwealth was $1.15 higher at $70.14.
Macquarie Group also performed well, adding $2.03, or 4.9 per cent, to $43.51.
Among the miners, BHP shares were up 66¢ at $31.61 and Rio Tinto was 40¢ higher at $52.04.
But shares in major goldminer Newcrest Mining were down 16¢ at $9.74, continuing its bad run as the price of the precious metal falls.
Telstra also fell, losing three cents to $4.76.
The Sydney gold price was $US1257.22, up $US35.52 from $US1221.70 on Monday.
National turnover was 1.4 billion securities worth $3.9 billion.
The dollar was higher due to stronger than expected inflation data out of China. At 5pm on Tuesday it was trading at US91.83¢, up from US90.58¢ on Monday.
During trade on Tuesday, the dollar dropped after the release of the National Australia Bank monthly business survey. It showed business conditions in June had slumped to their lowest level in four years.
But Chinese consumer price index figures released at the same time helped the currency to make a sharp recovery, OzForex chief currency strategist Jim Vrondas said.
The data showed China's annual inflation accelerated to 2.7 per cent in June, ahead of market expectations of 2.5 per cent.