Mobs of youths had fired at police with machineguns just before throwing the grenade into a police truck, Benedict Kigen, a senior police intelligence officer said.

The riots broke out on Monday after Aboud Rogo, accused by the United States of helping al Qaeda-linked Islamist militants in Somalia, was shot dead. Gunmen sprayed Rogo's car with bullets in an attack many Muslims in Mombasa blamed on the police, who denied involvement.

Police said at least 16 police officers were wounded in the grenade attack in Kisauni, a predominantly Muslim area, where youths set two churches on fire and barricaded roads with burning tyres as the riots spread to the outskirts of Kenya's second-biggest city, a tourist hub and major Indian Ocean port.

"These are pure criminals, and now terrorists are infiltrating within to launch grenades at us. They are looting even chicken," Kigen told Reuters.

The city's main streets, usually thronged with shoppers and foreign tourists, were deserted and some shops were shuttered. Shopkeepers reported looting in some areas of the city and police said rioters had looted and set fire to a bank.

"People are breaking into our shops and looting our property and police are doing nothing," said Francis Mutua, 33, a kiosk owner who said he and his colleagues had beaten up an offender.

Shopkeeper Kassim Ali also complained about police as they cleared a smouldering roadblock nearby. "These people, the police, are joking. They are taking this thing lightly, but the way I see it, it will not be good," he said.

One person was killed in riots on Monday when protesters set fire to several churches, stoking fears that the unrest may become more sectarian in a city where grenade attacks blamed on Somali militants and their sympathisers have already strained Muslim-Christian relations. Mombasa has a big Muslim minority.

Police and Muslim leaders had described the church burnings as impulsive, not premeditated. On Tuesday the gangs of youths appeared to focus their anger more on the police.

Church leaders scrapped plans for a peaceful march on Tuesday for fear it might incite further clashes in a country where overall relations between Muslims and Christians have been relatively good.

"We have been asking how we will defend ourselves. We are wondering how the killing of Rogo was related to churches and Christians. Muslims are now against the Christians and that is what we need to concentrate on," said Bishop Lawrence Dena.

Sheikh Mfaume Bakari Mfaume, representing Muslim clerics at a meeting called by Muslim and Christian clerics to end the violence said: "Muslims did not plan these attacks. These were rogue youths, and the fact that they might be Muslims doesn't drag the entire Muslim fraternity in this."

RADICAL PREACHER

Washington and Nairobi had both accused Rogo of helping al Shabaab, Somalia's Islamist rebel group.

The al Qaeda-linked militant group urged Kenyan Muslims on Tuesday to protect their religion at all costs and boycott next year's presidential election. It condemned what it called a "witch-hunt" against Muslims by the Kenyan authorities.

"Muslims must take the matter into their own hands, stand united against the Kuffar (non-believers) and take all necessary measures to protect their religion, their honour, their property and their lives from the enemies of Islam," al Shabaab said in a statement posted on the social media site Twitter.

The violence could worsen if it taps into long-standing local grievances over land ownership and unemployment, as well as calls by the Mombasa Republican Council MRC.L for the coastal strip to secede. The MRC said it was not involved in the unrest.

Prolonged trouble in Mombasa would hit Kenya's vital tourism industry, already damaged by the kidnappings of Western women tourists from beach resorts by Somali gunmen, at the height of the tourist season.

"Right now we have closed all our tourists in the hotels. We can't take them on safaris, we can't take them on tours of cultural sights ... because it is unsafe," said Titus Kangangi, owner of the Platinum hotel just north of Mombasa.

Mohammed Hersi, who runs the Whitesands Hotel, the largest resort on the coast, said tourists were worried. "It's tricky to even take them or pick them from the airport because the main highway from the airport is the epicentre of the chaos."

The unrest could also knock trade and transport to Kenya's landlocked neighbours. Rwanda and Uganda rely on Mombasa port for imports of food, consumer goods and fuel. (Additional reporting by Richard Lough; Writing by James Macharia; Editing by Louise Ireland)

• A Permanent Economic Emergency