* Fund wants to remove oil, gas stocks from benchmark index
* Would mean fund sells out of such stocks over time
* Decision by government expected this autumn
* Fund built on revenues from domestic oil, gas industry (Adds interview with commission chair, reactions)
By Gwladys Fouche
OSLO, Aug 24 (Reuters) - Norway's trillion-dollar sovereign wealth fund should continue to invest in oil and gas companies, a government-appointed commission recommended on Friday, contradicting earlier advice from the central bank, and boosting the shares of oil firms.
A decision on whether to drop energy shares from the fund's benchmark index, and thus divest tens of billions of dollars from oil and gas stocks over time, is expected this autumn.
Shares of European oil and gas companies fell last November when the fund's manager, the Norwegian central bank, announced its proposal to cut the exposure of the fund - and thus the Norwegian government - to oil price fluctuations.
On Friday shares of European oil firms, including Shell and BP, rose on the news of the commission's advice.
"To get that small insurance (against the fluctuation of the oil price by removing energy stocks), it would cost the fund a lot, as it would be less diversified," commission chair Oeystein Thoegersen told Reuters.
"Second, you would change an institution that has worked very well. And third, as the years go by, we have less and less oil risk," he said, referring to Norway's declining oil reserves.
The fund, the world's largest sovereign wealth fund, invests Norway's revenues from oil and gas production for future generations in stocks, bonds and real estate abroad.
Energy stocks amounted to about 4 percent of the value of the fund, or about 315 billion crowns ($37 billion), at the end of 2017, the commission said.
Finance Minister Siv Jensen, who will present the government's decision this autumn, did not signal on Friday which way a decision would go. "I look forward to reading the assessment," she said in a statement.
The fund is among the largest investors in a wide range of oil companies, holding stakes at the end of 2017 of 2.19 percent in Shell, 2.17 percent of BP, 0.94 percent of Chevron and 0.87 percent of Exxon Mobil.
The fund also held 1.42 percent of Eni, 1.79 percent of Total and 0.22 percent of Lundin Petroleum , among others.
"We have given our advice and we are now awaiting the government's decision," deputy central bank governor Egil Matsen said in an emailed statement to Reuters.
In a scenario with sustained lower oil prices, the reduction of the government's net cash flow from petroleum activities would be substantial, according to the commission.
A sale of energy stocks would also challenge the investment strategy of the fund, with broad diversification of investments and a high threshold for exclusion, it added.
"Should the owner seek any additional reduction in oil price risk, it is likely to be more effective to reduce the Norwegian state's direct ownership in Equinor or the state's Direct Financial Interest (state-owned oil firm Petoro)," the commission said.
The Norwegian state owns 67 percent of Equinor, formerly known as Statoil, and 100 percent of Petoro. Successive Norwegian governments have ruled out reducing the state's stakes in those companies.
Some observers of the fund did not welcome the commission's findings.
"This recommendation will prove to be a failure and the Norwegian Government will be forced to change this as fossil fuel investments continue to drag down global investment indexes and the Norwegian economy," Tom Sanzillo, Director of Finance for US energy finance think-tank, IEEFA, told Reuters.
$1 = 8.4525 Norwegian crowns Editing by Terje Solsvik, Dale Hudson and Kirsten Donovan