* Raids on coast killed about 100 people since mid-June
* Kenyatta faces challenge to reassure nervous nation
* Sanguine investors may take fright if violence escalates
* Police tough tactics may breed Muslim resentment
By Edmund Blair
NAIROBI, July 11 (Reuters) - Kenya may face a full-blown insurgency on its coast unless President Uhuru Kenyatta can douse a combustible mix of ethnic rivalries, land rows and Islamist militancy.
Gunmen have killed about 100 people since mid-June, exposing festering problems that could test Kenyatta's ability to reassure a nation fretting about wider security a little more than a year into his first term. Despite dozens of arrests, the government has yet to identify the culprits.
"We have a serious radicalisation threat," said Rashid Abdi, a specialist on Kenya and the Horn of Africa, who sees the "beginning of a coastal insurgency" supported by regional Islamists and other groups playing on local grievances.
Investors have so far been unperturbed, piling into Kenya's debut Eurobond last month even as bodies were counted on the coast. But if the government fails to stop those driving the attacks and address local grievances, Kenyatta's promise to lift already stuttering growth may start to look empty.
The chilling message scrawled on a wall in Lamu town, an old Arab trading port near where attacks erupted, reads "Boko Haram ndio njia" in Swahili, or "Boko Haram is the way", referring to an Islamist insurgency that is the scourge of northeastern Nigeria.
Kenyatta's administration, already facing criticism for mishandling an Islamist attack on a Nairobi shopping mall last year that left 67 dead, says it is chasing down the culprits of recent assaults and has security under control.
Political opponents accuse the government of relying on heavy-handed police tactics and playing politics instead of addressing the real causes.
"The situation on security is worrying and that adds to the impression that he may not be in charge, in control of the whole thing," said Macharia Munene, a professor at Nairobi's United States International University.
Munene said the failure to stop the attacks built on a growing list of unfulfilled promises from the government that range from handing out laptops to school kids to sacking officials who fail in their jobs.
Kenyatta, 52, son of Kenya's first president, has already had a challenging time in office, and faces trial in October in the International Criminal Court on allegations he orchestrated ethnic violence after the disputed 2007 election.
"I think he needs to take a deep breath, stop talking too much, and be seen to take action," said Munene.
The president's initial public response to the first attacks last month, when gunmen killed 65 people in an area around Mpeketoni in Lamu County, which lies near the Somali border, baffled and angered many Kenyans in equal measure.
"LIKE SECOND-CLASS CITIZENS"
Somalia's al Shabaab Islamists said they were behind the attacks, a group Kenya has routinely blamed for a spate of violence on the coast and in Nairobi in recent months. Al Shabaab says such attacks are revenge for Kenya's deployment of troops against its forces in neighbouring Somalia.
But Kenyatta swiftly dismissed the claim this time and blamed local political networks instead in what his critics say was an attempt to implicate his presidential rival Raila Odinga.
Officials have echoed the line as more attacks followed.
Experts, diplomats and police suggest a confluence of factors at work, which did not preclude Somali-linked Islamists with help from disgruntled local players.
One Western diplomat said senior officials privately noted al Shabaab appeared to have had a role. But he said he was "not sure the government of Kenya knows how to react".
Aides insist Kenyatta has intelligence backing his assertion that politicians are to blame and say he has the issue in hand.
Munyori Buku, the presidency's senior communications director, said security forces would have the problem wrapped up in the "next few days and weeks". He said long-standing complaints had to be addressed but said they could not be blamed for the violence by "terrorists and criminals".
Opponents, however, said the comments by Kenyatta, an ethnic Kikuyu, were political point-scoring against Odinga, a Luo who has been whipping up crowds with anti-government rallies.
It is a high-stakes row in a nation where politics and ethnic loyalties are intertwined, a toxic brew that has erupted in violence in the past. "(Kenyatta) should have cooled his heels and acted like a statesman," said one diplomat.
Singling out politicians also runs the risk of ignoring the grievances that can be exploited by Islamist advocates of militancy or secessionists like the Mombasa Republican Movement.
Traditional coastal people have long complained of neglect by central government and favouritism towards more recent arrivals to the region, including Kikuyus who originally come from uplands in the centre of the east African country.
"We are here like second-class citizens even though we are indigenous to the area," 62-year-old Muslim preacher Mahmoud Abdulkadir told Reuters in Lamu after the June attacks, saying such complaints were driving some youths to Islamist militancy.
WAR ON KENYATTA'S "DOORSTEP"
Land ownership is a major grumble. Coastal people say they are treated as squatters on ancestral land with no formal documents where newcomers have been given title deeds.
The government denies bias. Buku said 60,000 deeds had been handed out, with one 1 million more planned. Experts say the complaints run back decades to when Kenyatta's father was president after independence in 1963, and even to British colonial times.
But the coastal killings, which left many Kikuyus among the dead, may have aimed to touch a nerve in State House in Nairobi. Mpeketoni was known as a mostly Kikuyu town.
"They seem to be determined to break down the president emotionally, by taking the war right to his doorstep," said one police source, who asked not to be named.
Police tactics may also have helped provide fertile ground for militants. Security forces have rounded up hundreds of people, often Kenyans of Somali origin, after attacks in past months. Most were released without charge.
Three leading radical Islamist preachers have been killed on the coast in the past two years by gunmen, sparking protests. Many Muslims call them extra-judicial killings, which police deny but they have so far not found the attackers.
Sheikh Juma Ngao, chairman of the Kenya Muslim National Advisory Council, said police action built resentment.
"All these (issues) angered many of the radical Muslims, and what we are seeing in Lamu could be revenge," he said. "Combined with the historical issues about resources, then you have a full-blown problem."
While the public frets, the government can take solace that investors have so far taken security worries in their stride.
The tourist industry may have taken a beating but Kenya has a diversified economy, which reassures investors. Kenya's first Eurobond worth $2 billion closed oversubscribed in mid-June just after the first raids. But they may not remain sanguine.
Analysts say handing out title deeds needs to move faster, and the government must deal with other complaints such as unemployment, made more difficult with hotels struggling or closing as tourists flee the coastal region.
"If you had an insurgency, it would probably change investors' perceptions of Kenya and the risks associated with investing here markedly," said Phumelele Mbiyo, regional economist at CFC Stanbic Bank in Nairobi. (Additional reporting by Joseph Akwiri in Mombasa and Drazen Jorgic in Lamu; editing by Philippa Fletcher)
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