Dubai's index soared the most in four years following a Russian-backed bid to get Syria to surrender its chemical weapons.
The proposal from Syria's biggest ally, has eased worries from retail investors over a potential spillover to the Arabian Gulf.
"Russia is trying to play the diplomatic middle man in the story, this surge is all thanks to Putin," said Sebastien Henin, a portfolio manager at The National Investor, an Abu Dhabi-based investment bank. "Maybe we will avoid a big mess."
The Dubai Financial Market General Index jumped 8.5 per cent, the most since December 14 2009, to close at 2,522.15, reversing a panic sell-off over the past two weeks. The potential diplomatic solution came after the Russia foreign minister Sergei Lavrov said the country was working on an "effective concrete plan".
Property and construction stocks led the surge. Dubai Investments, the owner of stakes in more than 40 companies, rocketed 14.4 per cent to Dh1.74 a share. The maximum share price gain allowable on a given day on the Dubai bourse is 15 per cent.
Arabtec Holding, Dubai's biggest contracting company, jumped 11.2 per cent to close at Dh2.37 a share. Shares of Emaar Properties, the developer behind the Burj Khalifa, gained 8.4 per cent to Dh5.75 each.
The Abu Dhabi Securities Exchange General Index jumped 5 per cent to close at 3,671.59 points, led by property and banking stocks. Aldar, the developer behind Yas Island and Ferrari World, advanced 12.2 per cent to close at Dh2.47 a share. Sharjah Islamic Bank gained 13.3 per cent to Dh1.36 a share.
Tariq Qaqish, the head of asset management at the Dubai-based Al Mal Capital, said: "The latest political development was seen as great news for investors, as everybody had been concerned about the possible contagion effect on the Gulf states."
Brokers said the steep 7.9 per cent decline in stocks from August 25 had highlighted the need for a market maker to manage volatility.
A market maker is a broker-dealer who balances supply and demand for shares by serving as a matchmaker between buyers and sellers.
"We need a mechanism in place when the market goes to an extreme to prevent such big fluctuations," said Fathi Ben Grira, the chief executive at Mena Corp in Abu Dhabi. The UAE federal market regulator, the Emirates Securities & Commodities Authority, approved regulations to govern market-making last October.
Dubai's index is ranked second among the top performing benchmarks globally this year, rising as much as 55 per cent, after a previously laggard stock market steamed ahead to better reflect the UAE's underlying economic fundamentals. The ADX is ranked fourth globally in the same period.
"I think the market and people overreacted to the news flow in recent weeks. We are a top market - at the same time we have strong retail participation in the market, so we shouldn't be surprised to see such volatility in the market in the coming weeks," Mr Henin said.
The sharp move had proved that the previous declines "were purely political risk than a fundamental story within the GCC economies", said Mr Qaqish.
"The volatility had been the work of retail investors. It needed some correction. It couldn't come from the fundamentals because they were good, so it had to come from somewhere else: Syria."