(Adds details, dealers comments, naira close)
LAGOS, Dec 9 (Reuters) - Nigeria's overnight lending rate fell to 50 percent on Tuesday, from a record high of 70 percent the previous day after the central bank refunded naira to dealers who participated at a dollar auction but did not win bids.
The central bank has been struggling to keep the naira within a new target band of 160-176 against the dollar it set after it devalued the currency by 8 percent last month, to halt a decline to its foreign reserves.
Dealers have to fund their naira account with the central bank two days in advance to be able to participate at the bank's twice-weekly forex auction. The bank sold $199.9 million at its auction on Monday, lower than the previous $289 million.
The shortage of dollars sold at the auction pushed extra demand to the interbank market, dealers said, causing the naira to weaken 0.27 percent on Tuesday from its previous close.
The bank last month banned the sale of dollars to importers of telecom equipment, power generators and finished products at its foreign exchange auction.
"People are taking positions ... thinking that the market is still far from where it should be. But liquidity is still very scarce," one dealer said.
The central bank sold an undisclosed amount of dollars late onto the market, but dealers said the intervention was not enough to quell demand.
ExxonMobil also sold $50 million, to buy naira to fund its local obligations, dealers said.
The currency recovered to an intraday high of 176.85 after the dollar sales but it then quickly slipped back to close at 182.60 naira as the market absorbed the liquidity. It closed at 182.10 naira the previous day.
The balance that lenders hold with the central bank opened at a debit of 120 billion naira on Tuesday, down from 20 billion naira deficit the previous day. The banking system was about 400 billion naira in credit two weeks ago.
The bank has enforced a new cash reserve requirement for commercial lenders to curb liquidity and is squeezing cash from the system to try to support the naira.
(Reporting by Oludare Mayowa and Chijioke Ohuocha, Editing by John Stonestreet and Crispian Balmer)