(Adds naira close, dollar sales, quote)
By Chijioke Ohuocha
LAGOS, Jan 22 (Reuters) - Nigeria's naira recovered from record lows hit this week after the central bank increased forex trading limits and sold dollars to commercial lenders on Thursday, dealers said.
The unit rose 0.45 percent to close at 188.35 naira after ending at a record closing low of 189.20 for the two previous sessions.
Liquidity conditions have deteriorated as the naira has slumped to record lows because dollar inflows from foreign investment and other sources have dried up.
The central bank is having to intervene and sell dollars into the market, but that is burning up its foreign reserves.
The central bank increased foreign currency trading position for commercial banks to 0.5 percent of their capital base from 0.1 percent, to shore up interbank dollar liquidity.
Italy's Eni also sold $10 million to buy naira for its local operations, dealers said.
"These policy reversals are not ideal for central bank credibility but are a step in the right direction in terms of improving spot naira liquidity," said Oyinkasola Anubi, sub-Saharan Africa economist at Bank of America Merrill Lynch.
"Overall these sort of policy changes are just delaying the inevitable currency devaluation which we believe will happen after the elections."
According to a circular seen by Reuters, the central bank said funds sold to commercial lenders would be used for funding letters of credit, other invisible trades but should not be resold to bureau de change dealers.
The central bank had reduced dealers open positions from 1 percent to zero in a bid to stabilise the currency after it was devalued by 8 percent against the dollar in November.
Last week it allowed banks a 0.1 percent net position but warned them against carry trades or speculative activity.
Banks can earn trading revenues when the naira is weak through carry trades, by borrowing the naira to buy dollars which they resell at a higher level to make a profit. That makes it difficult for genuine forex users to buy dollars when liquidity is tight.
The naira is at risk of speculative attacks as it is being hit hard by the slump in oil prices and by pressure on emerging market currencies as the dollar strengthens on expectations the United States will soon raise interest rates.
Nigerian currency dealers agreed on Wednesday to halt trading if there is a more than 2 percent intraday slide in the naira. They said they fear the naira could head to 200 to the dollar, creating extreme volatility and exacerbating liquidity conditions. (Additional reporting by Oludare Mayowa)