May 6 (Reuters) - Indian shares advanced on Wednesday, as hopes of a possible deal between the U.S. and Iran to end the war pushed crude prices sharply lower, easing some concerns over the hit to growth and inflation in Asia's third-largest economy.

New Delhi approving a credit guarantee scheme worth $1.9 billion to support businesses, particularly small firms, hit by the Iran war, boosted bank shares.

India's benchmark Nifty 50 rose 1.24% to 24,330.95, while the BSE Sensex added 1.22% to 77,958.52. The indexes posted their biggest single-day gain since April 15.

Fourteen of the 16 major sectors advanced, led by banks. The broader small-caps and mid-caps rose 1.9% and 1.8%, respectively.

Brent crude dropped 7.5% to about $102 per barrel, lifting global equities after Axios reported that Washington believes it is getting close to a one-page framework agreement with Iran to end the war.

Iran said it would accept a peace deal only if it was "fair", after U.S. President Donald Trump paused a three-day-old naval mission tasked with reopening the Strait of Hormuz.

The war has battered Indian markets, with Nifty down 3.4% and the rupee depreciating about 3.7% since the end of February.

"Signs of progress in peace talks lifted market sentiment on the day, while an earnings season with no major negative surprises has added another layer of support," said Deven Choksey, managing director at DRChoksey FinServ in Mumbai.

Markets need a conclusive end to the conflict for the rebound to hold, Choksey said.

Banks rose 2.6%, private banks added 2.4%, while state-owned lenders gained 2.8%.

Index heavyweight HDFC Bank gained 3.1% after Reuters reported that law firms reviewing the bank's governance are set to conclude they found no major lapses, clearing the way for the reappointment of its CEO.

Automaker Mahindra & Mahindra added 2.7%, extending previous session's gains after beating earnings estimates.

Coforge advanced 9.6% after reporting a more than 100% quarterly profit jump.

(Reporting by Bharath Rajeswaran in Bengaluru; Editing by Rashmi Aich and Mrigank Dhaniwala)

By Bharath Rajeswaran