The weighted index rose 127.05 points to 7,792.68, the highest closing level so far in 2009, on turnover of NT$123.26 billion (US$3.83 billion).

Gainers led losers by 1,800 to 866 with 244 stocks unchanged.

The market was lifted by Innolux's weekend announcement that it would acquire Chi Mei Optoelectronics in a share swap deal for US$5.38 billion to form Chimei Innolux Corporation.

The market opened up 0.47 percent and buying accelerated to boost flat panel makers amid optimism triggered by the acquisition, while interest also spread to select old-economy stocks as they were market laggards, dealers said.

Chi Mei rose 6.91 percent to NT$20.10, while Innolux gained 2.98 percent to NT$48.40.

"The combination will no doubt boost the new entity's international presence. Based on the strong gains, investors are very happy about that," Mega Securities analyst Alex Huang said.

The Innolux-Chi Mei deal has raised hopes that the sector will enter an era of consolidation, dealers said.

Chunghwa Picture Tubes added 6.98 percent to 3.68 as investors have expected the firm would be the target for acquisition, while AU Optronics closed up just 0.16 percent at 31.70 on concerns it would be threatened by the new entity.

"Despite the strong showing, the room for a takeoff is limited as turnover failed to expand accordingly," Huang said.

Taiwan Semiconductor Manufacturing Co rose 0.97 percent to NT$62.40 and United Microelectronics Corp gained 1.20 percent to NT$16.85.

Among old-economy stocks, Nan Ya Plastics added 2.13 percent to NT$57.50 and Formosa Plastics advanced 1.36 percent to NT$67.00.

In the financial sector, Cathay Financial gained 2.18 percent to NT$60.90 and Fubon Financial was 2.20 percent higer at NT$39.55.