NAIROBI: The Kenyan shilling fell 0.5 percent on Tuesday as investors covered short dollar positions after police said they were investigating a possible bomb attack in Nairobi on Monday.

Market players said the local currency weakened even though the central bank sold an unspecified amount of dollars during the day's trading and absorbed excess liquidity.

"There might have been panic (dollar) buying. People came in to cover their positions," said Duncan Kinuthia, head of trading at Commercial Bank of Africa, referring to importer and interbank activity.

The shilling closed the session at 85.90/86.10 per dollar, weaker than Monday's close of 85.45/65.

Monday's explosion in the central business district during the lunch hour wounded more than thirty people and bore the hallmarks of an attack by sympathisers of Somali Islamist militants.

The half percentage point drop was the biggest intraday fall in five days and saw the shilling extend its losing streak to ten days.

The central bank absorbed 9.5 billion shillings ($111.24 million) through repurchase agreements on Tuesday, in line with its frequent interventions this year to defend the local currency by absorbing excess liquidity.

"Shilling weakening is still firmly rooted in most traders minds," a Bank of Africa report said. "However, the central bank is expected to continue to support the shilling as it moves closer to the psychological 86.00 level."

The shilling has lost 0.8 percent so far this year, compounded by the country's falling yields on government paper, which has reduced foreign investor appetite in the debt market, and global risk aversion due to the euro-zone crisis.

At the Nairobi Securities Exchange, the benchmark NSE-20 Share Index slipped 0.3 percent to 3,627.64 points as investors booked profit after a recent price rally across the index, said Ronald Lugalia, an analyst at Afrika Investment Bank.

Kenyan lender Co-operative Bank was the biggest loser, falling 2.2 percent to 13.65 shillings a share, as banks suffered some of the heaviest losses.

In the debt market, government bonds worth 2.2 billion shillings were traded, up from 1.7 billion shillings on Monday. The two-year bond was the most traded paper at a yield of 11.7 percent.