* BSE Sensex logs best daily gain in 10 weeks
* Demand outlook for IT services industry positive - Kotak
* Most auto shares gain on higher August sales (Updates to close)
By Ami Shah
MUMBAI, Sept 1 (Reuters) - Indian shares began the month on a positive note led by software firms and closed Wednesday 1.3 percent higher, their best gain in 10 weeks, tracking regional markets which were boosted by a Chinese manufacturing rebound.
India's top software services firm Tata Consultancy Services (TCS.BO) rose 1.6 percent buoyed by its UK subsidiary Diligenta's contracts win totalling 250 million pounds. [ID:nWNAS9286]
Smaller rivals Infosys Technologies (INFY.BO) and Wipro WIPR.B firmed 2.5 percent and 0.9 percent respectively.
"We remain positive on the demand outlook for the Indian IT services industry," Kotak Securities said in a note.
"We expect the volume momentum seen over the past three quarters to sustain over the next few quarters."
The 30-share BSE index .BSESN gained 1.31 percent or 234.75 points at 18,205.87, with 27 of its components closing in the green.
"Market will stay rangebound this month. Upside will be capped in the near-term as valuations are not looking cheap," said R. K. Gupta, managing director of Taurus Mutual Fund.
"The key event to watch for in this month is the RBI's (Reserve Bank of India's) mid-quarter review on Sept. 16."
Foreign funds have ploughed $12.8 billion in Indian equities this year, including in the primary market offerings. The benchmark index has added 4.2 percent so far in 2010.
Financials rose on optimism after data on Tuesday showed India's economy grew at its fastest pace in nearly three years in the April-June quarter. [ID:nLDE67U1LA]
But, data on Wednesday showed India's manufacturing growth eased in August as the pace of new orders cooled following a slowdown in exports, underlining expectations that economic expansion has peaked this year. [ID:nSGE680054]
Leading lender State Bank of India (SBI.BO) rose 0.4 percent and rival private lenders ICICI Bank (ICBK.BO) and HDFC Bank (HDBK.BO) firmed 1.8 percent and 0.8 percent respectively.
Mortgage lender Housing Development Finance Corp (HDFC.BO) bucked the trend and edged 0.4 percent lower.
Energy giant Reliance Industries (RELI.BO), which has the highest weight on the Sensex, recouped some of Tuesday's losses and closed 1.9 percent higher.
It had dropped more than 3 percent in the previous session as investors gave a thumbs down to the company's stake buy in hotel chain EIH.
Vehicle makers mostly pushed higher, cheering robust August sales. [ID:nSGE6800C0]
Top car maker Maruti Suzuki (MRTI.BO) gained 1.4 percent while top utility vehicle maker Mahindra & Mahindra (MAHM.BO) closed 0.3 percent higher.
Vehicles maker Tata Motors (TAMO.BO) edged 0.1 percent higher while motorcycle maker Hero Honda HROH.BO bucked the trend and slipped 1.9 percent.
Metals stocks rallied as a rebound in manufacturing in China propelled base metals. [ID:nLDE6800SB]
Non-ferrous metals producer Sterlite Industries STRL.BO rose 3.6 percent with Nomura upgrading the stock to "buy" from "neutral." [ID:nBMA008364]
Aluminium maker Hindalco (HALC.BO) firmed 4.5 percent while Tata Steel (TISC.BO), the world's seventh-largest steelmaker, gained 2.9 percent.
Nearly three shares gained for every one that declined in a low volume of 361 million shares.
The 50-share NSE index .NSEI gained 1.3 percent to 5,471.85 points.
World stocks were firm, as data showed a manufacturing rebound in China and stronger-than-expected growth in Australia. [MKTS/GLOB]
The MSCI world equity index .MIWD00000PUS rose 0.8 percent by 1039 GMT, while the Thomson Reuters global stock index .TRXFLDGLPU climbed 0.9 percent.
STOCKS THAT MOVED
* Top mobile operator Bharti Airtel (BRTI.BO) rose 3.1 percent to 337.30 rupees ahead of its annual shareholders meet.
* Kingfisher Airlines (KING.BO) rose 5.1 percent to 62.40 rupees after the carrier's board approved raising up to $1 billion through various means including rights issue, preferential issue or global depositary receipts. [ID:nSGE680094]
* Sun Pharmaceutical (SUN.BO) slipped 0.5 percent to 1,751.30 rupees after the drugmaker late Tuesday said U.S. FDA has warned its U.S. unit about manufacturing problems uncovered at a plant in New Jersey. [ID:nSGE68002K]
* TVS Motor (TVSM.BO) firmed 1.3 percent to 143.95 rupees, as the vehicle maker said its August sales were up 34 percent on year. [ID:nWNAS9278]
MAIN TOP 3 BY VOLUME
* Shree Ashtavinayak (SACV.BO) on 12.9 million shares
* Piramal Healthcare (PIRA.BO) on 9.5 million shares
* Prakash Steelage (PRAA.BO) on 5.4 million shares
FACTORS TO WATCH * For technical analysis double click on www.reutersindia.net * India rupee report [INR/] * India bond report [IN/] * Dollar falls as equities bounce; Aussie surges [FRX/] * Oil tops $72 as China manufacturing picks up [O/R] * Strong Asian data boosts world stocks [MKTS/GLOB] * Wall Street futures signal higher open; data eyed [.N] * For closing rates of Indian ADRs INADR
(Editing by Malini Menon)