At 0620 GMT, leading commercial banks quoted the shilling at 84.60/70 against the dollar, stronger than Fridays close, when it fell 1.78 percent, the biggest intraday drop against the greenback since May 19, 2010, to an all-time low of 85.70/80.

"The shilling is strengthening from its lifetime low on Friday as banks shed their long positions from last week. I think there was a lot of speculation last week," said Amina Ali, a trader at Chase Bank.

Central Bank Governor Njuguna Ndung'u said on Friday that the shilling's slide was an overreaction driven by speculation that there were not enough exchange reserves to meet the country's needs, but traders said there was fundamental demand from importers.

Traders said they expected the shilling to strengthen further against the dollar by close of trade, if central bank acts to shore up the shilling.

"It would probably go higher if central bank acts on what they are saying. But could spring back beyond 86.00 if they do not act on what they are saying," said Chris Muiga, a senior trader at Kenya Commercial Bank.

"Central bank has two options. One is a direct intervention where they sell dollars in the market and the other is where they tighten short term liquidity making it expensive to fund short shilling positions."

Technical analysis shows the shilling weakening could pause at 86.00 unless the dollar gains versus regional currencies in which case the Kenyan currency could plunge as low as 90.00.