KBIF gets set and causes an interrupt and it is impossible to clear unless I clear KBMASK = 0x00
This MAY be correct operation of the chip. Disable the KBI in the ISR and reenable it when you, no, the chip :) go to sleep.

Have you ever used KBI this way with two or more pins to cause an interrupt?
I have never used KBI, it serves no purpose except in cases where you need a keypress to wake the processor up.

I spent a few minutes last i di a 932 keypad on using the KBI and found that combining that with debounce would make things much more complicated than ignoring it.
Were I to use the keypad int as a wake up, I would use it as such and NOTHING else. Then use my regular debouncing keypad routine as if no KBI existed.

Erik