The 84-year-old man - who can't be named due to a court order - was allegedly observed to have inappropriately touched a five-year-old girl as she attempted to ride a bike outside a home in Dubbo in June this year.

Following investigations police attended a home on Stonehaven Avenue and arrested the man about 1.30pm on Wednesday.

He was taken to Dubbo police station and charged with procuring a child under the age of 14 for unlawful sexual activity, and two counts of intentionally sexually touching a child under the age of 10.

The man fronted Dubbo Local Court via video link from the police cells, where his defence lawyer Ian McGuinness entered pleas of not-guilty to the charges.

The charges triggered a show cause hearing for the man to show why his detention was not justified. This came after the court heard the man had previously been convicted of a serious personal violence offence and on the child protection register.

Mr McGuinness argued his client was an elderly man who suffered from a hearing difficulty and time spent in custody would hinder his ability to conference his legal team effectively.

The Legal Aid solicitor argued strict bail conditions could mitigate risk to the community including no contact with the victim or a child under the age of 18 years and to report to police Mondays and Wednesdays.

"The strength of the case needs to be tested. There's a witness who sees something, but that is different to what is reported by the child at a later date," Mr McGuiness argued.

The police prosecutor opposed bail citing a strong prosecution case. She also said due to the serious nature of the charges, the matter was going to be referred to the Director of Public Prosecutions.

Magistrate Theresa Hamilton said while she took into account the man's age and physical disabilities, the charges were serious and it was aggravated by the fact he was already on the child protection register and had previously been charged with fail to comply to requirements.

The man was refused bail and the matter will return to court in July.