* Norway's oil fund divests oil firms Cairn and Kosmos
* Ban triggered by Western Sahara business
* Both companies protest the exclusion
OSLO, June 28 (Reuters) - Norway's $834 billion sovereign wealth fund, the world's largest, said on Tuesday it has banned Cairn Energy (LSE: CNE.L - news) and Kosmos Energy (NYSE: KOS - news) from its portfolio due to their business in the disputed territory of Western Sahara.
The two oil and gas firms both said they had done nothing wrong in connection with their business in the region.
Western Sahara has been ruled by Morocco since 1975 but faces a rebellion from the self-declared Sahrawi Republic. Dozens of United Nations staff were expelled earlier this year when Secretary-General Ban Ki-moon used the word "occupation" to describe Morocco's presence.
The Norwegian fund, which owns around 1.3 percent of all listed global shares, has a range of ethics criteria for exclusions, including severe environmental damage, nuclear weapons making, labour conditions and human rights.
It is advised on exclusions by the Council on Ethics, mandated by Norway's parliament. The council makes recommendations to the board of the country's central bank, which supervises management of the fund. The board then decides whether to follow the council's advice.
"The Council recommends the exclusion (of Cairn and Kosmos)... due to an unacceptable risk of the companies contributing to serious violations of fundamental ethical norms through their hydrocarbon exploration offshore Western Sahara," the council said.
"The Council is of the view that no distinction can be made between exploration and exploitation activities in this context," the council said, adding that it "has not been satisfied that the operations take place in accordance with the wishes and interests of the local people".
Kosmos said it fundamentally disagreed with the decision.
"We have spent considerable time on the ground working with local people to understand their views of oil and gas exploration," a spokesman said in a emailed statement.
He added that the council turned down an additional meeting with the chief executive and chairman of Kosmos who wished to express their concern.
The council said the request for a meeting was received after its recommendation had been made to the fund in February, and that further meetings at the time could have violated insider information regulations.
Britain's Cairn separately said it was disappointed with the fund's decision to divest.
"Cairn has always acted in accordance with international law which states that responsible exploration offshore Western Sahara, a U.N. designated non-self-governing territory, can occur in parallel with the U.N.-led discussion on the region's future," the firm said in a statement.
The fund's ethics council said disagreement with companies were common in the case of exclusions.
"There is no company in the world which says that it agrees its behaviour is grossly unethical," the ethics council's administrative leader, Eli Ane Lund, told Reuters. (Reporting by Stine Jacobsen; Editing by Alexandra Hudson)