THE Labour government of the 1970s was urged to set up a fund to capitalise on the discovery of North Sea oil but ignored the call, a newly discovered document shows.

The advice was rejected by the then Prime Minister James Callaghan.

Since then Norway, which did set up a fund, has gone on to amass £500 billion.

First Minister Alex Salmond denounced the disclosure as damning.

The oil fund paper was written by Professor Gavin McCrone, then the Scottish Office's chief economic adviser. He revealed the existence of the advice when he appeared in front of Holyrood's finance committee.

The professor was also the author of a 1974 paper that said the discovery of North Sea oil had "turned the traditional arguments against Scottish nationalism".

The 1974 paper is often cited by the SNP as proof the UK Government hid the real potential of North Sea oil. Mr Salmond said: "These are yet more damning revelations which lay bare the extent to which Westminster has mismanaged Scotland's oil wealth."

A Scottish Labour spokesman said: "With so many holes in the economic case for separation, the nationalists would rather hark back to grievances from 40 years ago than set out where they would find money to fund an independent Scotland."