* Government advises fund should up equity stake to 70 pct
* Government advises cutting spending from fund to 3 pct of value
* Central bank governor: risk of oil money dependence remains high (Adds reaction from the central bank, other political parties, bullet points)
By Ole Petter Skonnord and Camilla Knudsen
OSLO, Feb 16 (Reuters) - Norway's $900-billion sovereign wealth fund, the world's largest, should shift more of its investments into equities and away from bonds to counter the effects of ultra-low interest rates, the government said on Thursday.
And in a major shift in policy, Norway's minority right-wing government recommended cutting how much of the fund it is allowed to spend each year to 3 from 4 percent.
Norwegians have built up the fund from oil revenues and it is regarded as an insurance policy for when oil and gas reserves run out. Its value is the equivalent of $171,000 for every Norwegian man, woman and child.
In recent years, the fund has diversified its investments away from Europe, and into the United States and Asia, and begun investing in real estate, raising its risk appetite in an attempt to increase long-term returns.
Changing the country's fiscal spending rule, in place since 2001, is a major policy departure. Until very recently, any suggestions of changing the rule have been rejected by successive prime ministers.
But in October last year Prime Minister Erna Solberg raised the possibility that the guideline should be changed, due to the lower expected return of the fund.
Finance Minister Siv Jensen told Reuters on Thursday she had consulted with parties outside government on the question ahead of the announcement.
"We have been in a dialogue with other parties about this," she said in an interview, declining to say whether she believed she had a majority in parliament for the proposals.
"My impression is that there is broad agreement for setting a good framework for the management of the fund," she said.
The Liberal Party's finance spokesman told Reuters he supported tightening the fund spending rule, giving the government the majority it needs to pass that proposal. Another party, the Christian Democrats, also said they supported that change.
Although any reallocation is expected to take several years, if the proposed change from 60 percent to 70 percent in equities was made today, the fund would move about $90 billion away from government bonds, which are dragging on its performance.
At present the fund's overseas investments are limited to 60 percent stocks, 35 percent bonds and five percent real estate.
Under existing rules, governments can spend an average four percent of the wealth fund per year, but ultra-low global interest rates and other market conditions make it unlikely that the fund can earn returns of this magnitude, economists say.
"All in all, the government considers an equity share of 70 per cent to carry acceptable risk. The downwards revision of the return estimate underpins the long investment horizon of the fund, a prerequisite for holding a high share of equities," Jensen said in a statement.
The governor of the central bank, which manages the wealth fund, welcomed the announcement but said Norway still ran the risk of becoming too dependent on oil money even after tightening its spending.
"A further escalation of spending from today's levels would be a daring move, even if the fund itself were to grow," Governor Oeystein Olsen said in response to the government's proposal.
"Fiscal policy must be decoupled from financial assets subject to considerable volatility ... The period of rising government spending of petroleum revenues should now be over," Governor Oeystein Olsen said.
The change in the fund's spending limit to 3 percent from 4 percent will constrain the current and future governments' ability to increase government spending, and would amount to a tightening compared to forecasts made by the central bank, Nordea Markets economist Erik Bruce said.
"In other words it opens the room for more expansionary monetary policy," he wrote in a research note, while adding that in the current situation the central bank was still likely to keep interest rates on hold.
Solberg's government plans a record budget deficit of 225 billion Norwegian crowns ($27 billion) in 2017, to be covered by the fund and corresponding exactly to 3 percent of its value. (Additional reporting by Gwladys Fouche and Terje Solsvik; Writing by Gwladys Fouche; Editing by Alexander Smith, Greg Mahlich)