UPDATE 1-Tea sales buoy Kenyan shilling, stocks dip

* Tea is Kenya's leading foreign exchange earner

* Nation Media shares the biggest faller

(Recasts with market close, adds stocks)

By Beatrice Gachenge

NAIROBI, Oct 2 (Reuters) - The Kenyan shilling

firmed

against the dollar on Tuesday, boosted by tea sales from the country's weekly auction and the central bank's tight monetary measures, while stocks fell for the third straight session.

Kenya is the world's leading producer of black tea, and the crop is its top foreign exchange earner.

At the 1300 GMT close of markets, commercial banks posted the shilling at 84.80/85.00 to the dollar, firmer than Monday's close of 85.20/40.

"Tea was the main driving factor," said Chris Muiga, a senior trader at Kenya Commercial Bank.

Tea auctions in east Africa's biggest economy are conducted in dollars and attract major international buyers, which typically helps to support the local currency.

Earnings from tea exports are expected to rise 1 percent this year to 110 billion shillings ($1.29 billion), held back by poor weather conditions in the first half of the year.

During Tuesday's session, the central bank also offered to mop up 7 billion shillings in excess liquidity and received bids worth 9 billion shillings, accepting bids totalling 8.05 billion shillings.

The central bank has persistently drained excess liquidity most of this year to support the shilling

, which is 0.3 percent stronger against the dollar in the year-to-date.

Given that year-on-year inflation fell to 5.32 percent in September from 6.09 percent in August, traders said they were wary due to the chance of another interest rate cut to shore up the economy when policymakers meet in November because that would put pressure on the shilling.

Policymakers slashed the benchmark lending rate last month by a record 350 basis points to 13 percent.

In the Nairobi Securities Exchange, the benchmark NSE-20 Share index

fell 0.5 percent to 3,945.25 points, dragged down by a retail investor sell-off.

Nation Media Group

was the biggest faller, dropping 3.7 percent to 204 shillings, while the country's largest sugar miller, Mumias Sugar

, was down 3.1 percent to 6.25 shillings.

Ronald Lugalia, a research analyst at Africa Investment Bank, said investors dumping shares may be a sign that they are shifting their focus back to government debt due to steadily rising yields.

"Right now with interest rates rising, you will see investors going for the short-term papers," said Lugalia.

The 91-day Treasury

bill yield rose to 8.093 percent at auction on Thursday, up from 7.647 percent previously.

On the debt market, bonds worth 2.26 billion shillings were traded, marginally lower from Monday's close of 2.28 billion shillings.

...........................Shilling spot rates

.....................Shilling forward rates

.......................Cross rates

..................................Local contributors

.......................Central Bank of Kenya Index

.....................Kenyan Bonds contributor pages

...............Treasury bill yields

..................Central bank open market operations

.........................Horizontal repo transactions

,

................Daily interbank lending rate

.............................Kenya Bond pricing

..................Real time Africa economic data

...........................African economic news

.................................NSE-20 Share Index

.................................NSE All Share Index

...........................FT NSE Kenya 15 Index

.......................... FT NSE Kenya 25 Index

SPEED GUIDES:

($1 = 85.1250 Kenyan shillings)

(Reporting by Beatrice Gachenge; Editing by Drazen Jorgic/Ruth Pitchford)

((nairobi.newsroom@reuters.com)(Tel: +254202224717))

Keywords: KENYA MARKETS/