Shares posted their best day since February boosted by a strong lead from Wall Street, a bounce in the iron ore price, and a better than expected reading of Chinese manufacturing activity, which is a positive for Australia's major exports.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index both lifted 1 per cent, on Thursday to 5479.9 and 5458.1 respectively with the gains broadly based and all major sectors advancing.

Mining stocks rebounded as the spot price for iron ore, landed in China, recovered 1 per cent at $US98.50 a tonne. However, fears remain that the commodity price of Australia's biggest export could continue to slide as increased global production collides with slowing demand growth and credit tightening in China.

Australia's biggest producer of iron ore, Rio Tinto, rallied 2.6 per cent to $60.96, while iron ore miner Fortescue Metals Group bounced 3.6 per cent to $4.59. Resources giant BHP Billiton gained 1.3 per cent to $37.65.

Zurich Financial Services took profits and sold out of its stake in FMG earlier this year but retains a confident outlook for the two biggest miners Rio Tinto and BHP Billiton.

"We got out of FMG after a good run in anticipation of the iron ore price falling below $US100 while the local dollar remains strong, but even on a very bearish outlook for iron ore prices where the metal price falls below $US90 per tonne and stays there for months BHP and Rio will still do well," Zurich Financial Services senior investment strategist Patrick Noblesaid.

The market, and miners in particular, got an extra boost after a monthly measure of Chinese factory activity unexpectedly jumped to a five-month high. The HSBC Flash China Manufacturing purchasing managers index lifted 1.6 points in May to 49.7 beating the consensus forecast for 48.4. Alumina added 7.1 per cent to $1.43.

Australia's biggest oil producer Woodside Petroleum rose 1.2 per cent to $41.72 following an investor briefing on the heels of Wednesday's announcement it has abandoned an Israeli joint venture. Shareholders now expect a special dividend if the company can not identify a new investment opportunity.

Rumoured Woodside takeover target Oil Search added 1.2 per cent to $9.25. Brent crude oil, the benchmark most closely associated with the contract prices Australian producers fetch, was 0.1 per cent weaker at $US110.42 a barrel.

Gains in the big four banks also helped propel the market higher. Commonwealth Bank of Australia rose 0.6 per cent to $80.65, while Westpac Banking Corporation added 0.6 per cent to $33.86. ANZ Banking Group lifted 1.2 per cent to $33.41, and National Australia Bank gained 1.5 per cent to $33.54.

"The big four banks all look expensive but still have good fundamentals. It is not a good time to buy banks but they are still worth holding," Mr Noble said.

Among other bluechip favourites, Telstra Corporation was unchanged at $5.36, Woolworths added 0.7 per cent to $37.50, and Wesfarmers, owner of Coles, rose 1.1 per cent to $43.22.

Building materials supplier James Hardie lifted 5.7 per cent to $14.47 after showing full year profit rose 118.7 per cent . The result was in the upper range of the company's guidance and investors welcomed a move to up the final dividend from 13¢ to 20¢ and pay out another special dividend of 20¢.

Logistics group Qube Holdings jumped 6.4 per cent to $2.33 as its joint bid with industrial rail provider Aurizon won a government to develop an intermodal terminal at Moorebank in western Sydney. The freight hub, which is estimated to be a $1 billion development, will facilitate the transfer of goods between trucks and trains.

Bradken was the worst-performing stock in the ASX 200, down 4 per cent at $3.40, as investors digest the mining services group's down-sizing plans.

Rare earths miner Lynas Corporation, which owns a processing plant in Malaysia, was the best-performing stock in the ASX 200 climbing 9.1 per cent to 12¢ amid reports China, the world's biggest producer, is considering raising the taxes on rare earths. A $30 million shareholder share purchase plan offer from Lynas closes on Friday.

Healthcare was the best-performing sector, up 1.8 per cent, led by CSL. The vaccine and plasma product exporter lifted 1.3 per cent to $69.77 with investors please to see the Australian dollar trading back under $US93¢ for the second day in a row.

The latest listed investment company to hit the boards, PM Capital Asian Opportunities Fund, dropped 3.5 per cent on its initial public offer to 96.5¢. New Zealand's Intueri Education Group will float its $200 million IPO on Friday.

"It is great for the market to see a few big IPOs coming through," Mr Noble said.