The Kenyan shilling reversed earlier losses to close firmer against the dollar on Monday for the fourth straight session, helped by new limits on the amount of foreign exchange banks can hold, while stocks edged up on bets the recent sell-off was overdone.

Commercial banks have been selling dollars after the central bank lowered the amount of foreign exchange they could hold from 20 percent to 10 percent of their core capital last week.

The move, announced by Finance Minister Uhuru Kenyatta, followed a shock 400 basis points increase in the central bank rate to 11 percent to stem extreme volatility in the exchange rate and tame rampant inflation.

At the 1300 GMT market close, leading commercial banks quoted the shilling at 99.30/50 against the dollar, stronger than Friday's close of 99.45/65 and a sharp appreciation from its record low of 107, touched on October 11.

Banks selling dollars to reduce their holdings from 20 percent to 10 percent, as the central bank asked, is helping the shilling, said a trader with one commercial bank.

The central bank sought to mop up 2.5 billion shillings from the market through repurchase agreements, in line with its tightening stance, but did not receive any bids from commercial banks.

The bank soaked up 2.45 billion shillings last week, well below the 30 billion shillings it had targeted.

We could see it (shilling) trade at 97 or 98 per dollar from Wednesday, said the trader.

The shilling had weakened as much as 1.4 percent against the dollar at the start of trade on Monday, as importers took advantage of last week's 7.5 percent gains, to buy dollars.

Market players said they did not expect the deployment of Kenyan troops into Somalia to hunt down al Qaeda-linked rebels to impact the market immediately.

It will depend with the level of attack that we launch into Somalia. At the moment it looks like it's just (a small amount of) troops targeted toward the al Shabaab, said a senior trader at another commercial bank.

At the Nairobi Stock Exchange, the main share index rose 0.37 percent to 3,289.51 points as investors bet the recent sell-off was overdone and bought shares.

Most stocks have really lost this year and some investors feel prices are at a good level to buy. But it's too early to say if we've bottomed out, Deris Mugoi, an analysts at Standard Investment Bank, said.

Shares of Barclays Bank of Kenya, were among the top gainers, rising by 6.28 percent to close at 11.85 shillings.

In fixed income, corporate and government bonds worth 2.49 billion shillings were traded, up from 679.7 million shillings previously.