NAIROBI (Reuters) - Kenya's power grid failed on Tuesday, plunging east Africa's biggest economy into a nationwide power blackout, sole power distributor Kenya Power said.

Kenya Power supplies 1,250 megawatts of power to over 2 million customers connected on the national grid, against a demand of 1,700 megawatts, with most of the fuel generated from hydro power stations run by KenGen.

The company said two transmission lines failed carrying 400 megawatts (MW) of electricity from a geothermal power source in the Rift Valley, where KenGen is tapping vast reserves of steam energy in a geologically active region.

This set up a ripple effect, knocking out the national interconnected grid and generating system - which relies on hydro-power for the lion's share of its electricity - leading to a national power outage, the company said.

Businesses in the country of 40 million people often rely on diesel generators to make up the gap between power demand and output and cite frequent localized power blackouts as one of the key barriers to economic growth.

Growth is forecast to grow 6 percent this year from 4.6 percent last year and 4.4 percent in 2011.

Kenya Power said it was trying to re-start the grid "to restore power as quickly as possible", and investigate why the two transmission lines failed.

(Reporting by James Macharia; editing by Keiron Henderson)