* Commission recommends fund should become separate entity
* Also recommends reforms of central bank's management
* Final decision to be made by parliament (Adds quotes, background, detail, bullets)
OSLO, June 23 (Reuters) - Norway's $960 billion wealth fund, the world's largest, should be split from the country's central bank, which has managed the fund since its launch in 1996, a government-appointed commission said on Friday.
Norwegians have built up the fund with revenues from the country's vast offshore oil and gas sector and it is regarded as an insurance policy for when those reserves run out, meaning any changes will be subject to close political and public scrutiny.
In the future, the fund should be managed by a new state investment company with a government-appointed board and an investment mandate set by the finance ministry, the commission said.
"Both central banking and investment management place greater demands on the (central bank's) board, senior management and the organization than earlier," said commission head Svein Gjedrem, himself a former governor.
"Moreover, the activities differ in nature, and the scope of the tasks involved is substantial. With two separate entities, the professional competence and the governing bodies can more easily be tailored to the task at hand," he added.
The recommendations will be closely examined by Norwegian politicians, who had said ahead of the publication they were waiting for the report's conclusions before deciding what new assets, if any, the fund could invest in.
The fund, which is managed by a unit of the central bank, invests in bonds, stocks and real estate abroad, but is seeking to add new higher-yielding investments such as unlisted equity or infrastructure.
Norway's central bank, or Norges Bank, welcomed the report.
"Norges Bank has built a professional investment management organization that is well equipped to perform its task ahead, irrespective of the organizational structure," it said.
CENTRAL BANK MANAGEMENT REFORM
Currently the bank's board is responsible for running the bank, supervising the wealth fund and setting monetary policy, but this should change, said the commission, which also made proposals for the future organization of Norges Bank.
Those proposals envisage a monetary policy committee chaired by the governor and also consisting of the deputy governor, two part-time external members and one member who is also a full-time employee of the central bank.
The proposals will be subject to public hearings, and any changes will ultimately be decided by parliament.
Terje Breivik, a lawmaker from Norway's Liberal Party, a key external backer of the right-wing minority government, said he was pleased with the proposal to split the fund from the bank.
"This was our suggestion last year. The chances are of course very big that it will happen now," he told Reuters. (Additional reporting by Ole Petter Skonnord, Lefteris Karagiannopoulos and Nerijus Adomaitis, writing by Terje Solsvik, editing by Toby Chopra and Gareth Jones)