The Kenyan shilling weakened for the third day against the dollar on Thursday on importer demand for the greenback, while the main stocks index fell to a 15-month low on investor jitters, traders said.

At close of market at 1300 GMT, the shilling traded at 89.85/95 against the dollar after hitting 90.00 earlier, weaker than Wednesday's close of 89.70/80.

Traders said dollar demand from maize importers was partly to blame for the weaker shilling, and forecast the currency would remain under pressure due to the increased demand.

The government removed import tax on maize during last month's budget for the rest of the year to tackle shortages that have sent prices of the staple soaring, spurring buyers to buy maize from overseas to plug the gap.

Police fired tear gas to disperse people in Nairobi protesting against high food and fuel prices and a shortage of maize which has enraged many in east Africa's biggest economy, but analysts said the protests would end once maize supply is restored.

The local currency ignored the protests, traders said.

The shilling lost more than 1 percent against the dollar on Wednesday after reports that Kenya may import 4 million bags of maize this year to stave off shortages of the staple.

"At the moment (more) energy sector and also maize sector dollar demand might come in pushing the currency weaker. We might see a weaker shilling in the coming week," said Bhavin Chandaria, a trader at Imperial Bank.

However, Central Bank Governor Njuguna Ndung'u said that poor reading of information by market participants was to blame for fresh shilling weakness against the dollar.

"Immediately some market segments interpreted that there will be a scarcity of dollars in the market and so started raising the dollar price domestically to ration the imagined existing stock of dollars," Ndung'u told Reuters.

"But nobody asked the questions - who would import the maize and from where would the maize be imported?"

Ministry of agriculture and Treasury officials were not immediately available to comment on where or how the maize will be imported, whether it will be by private millers or the government will use central bank's hard currency reserves, which would stem demand for dollars in foreign exchange market.

Despite its weakness, the shilling is still off a record low of 91.90 against the greenback hit on June 22, having recovered in large part after the central bank raised its overnight rate to 8 percent.

The weighted average yield on 91-day Treasury bills fell to 8.954 percent on Thursday and traders said it would keep falling in coming auctions.

"The pressure for the government to give any paper for any rate is not there anymore. We are most likely to see those rates coming down and stabilising at between 7.0- 8.0 percent," Fred Mweni, the chairman for the Bonds Traders Association.

STOCKS AT 15-MONTH LOW

On stocks, the benchmark NSE-20 Share Index fell for the third straight day by 0.44 percent to 3,906.71 points.

Hotelier TPS Easter Africa fell 6.67 percent to 63.00 shilling a share to lead other shares lower, while Kenya Airways fell 3.45 percent to 35.00 shillings.

Analysts said negative sentiment by investors due to a rising inflation, volatile currency and political jitters as the country approaches the next general elections in 2012.

Kenya's inflation rate rose for the seventh straight month to 14.49 percent in June.

"Rising inflation and a falling shilling have sent negative sentiments among investors," said Deris Mugoi of Standard Investment Bank.

Kenya's economy is still recovering from effects of the violence that arose out of the 2007-2008 general election, that killed 1,200 people and displaced thousands.

Corporate and government bonds worth 2.77 billion shillings were traded, more than double the 1.3 billion shillings traded on Wednesday.

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