Norway's oil industry has suffered a major setback after the biggest party in the country's parliament withdrew its support for explorative offshore drilling around the Lofoten islands, an ecologically-sensitive archipelago in the Arctic Circle.

The opposition Labour Party - Arbeiderpartiet - on Saturday said it would stop pushing for oil drilling in the region, marking a dramatic shift in policy for the heavily union-backed party and creating a majority in parliament for protecting Lofoten from fossil fuel extraction, according to Bloomberg reports.

Moreover, while it said it would continue to support the industry and its existing tax system, the Party's leader Jonas Gahr Store said he wanted oil firms in the country to commit to a deadline for making all operations emissions free.

The announcement provides further evidence that political support for the oil and gas industry may be on the wane in Western Europe's biggest petroleum producer, which has built up a trillion-dollar sovereign wealth fund off the back of revenues from the sector.

That fund announced last month it was to ditch upstream oil and gas stocks in a bid to insulate Norway from a "permanent oil price decline", and on Friday Norway's government approved plans that would allow it to for the first time invest in renewable energy projects which are not listed on stock markets, significantly increasing its pool of available clean energy investments. The change could potentially double the sum the fund can invest in renewables projects to $14bn, reports, according to reports.

Oil drilling in the Lofoten region is seen by some in Norway's oil and gas sector as crucial for maintaining petroleum production levels in future, and Karl Eirik Schjott-Pedersen, head of the Norwegian Oil and Gas Association, said the sector was "surprised and disappointed" by the Labour Party's decision. "It doesn't provide the predictability we depend on," he told Bloomberg.

But green campaigners praised Arbeiderpartiet's decision, with Paul Nicklen, co-founder of ocean conservation group SeaLegacy, describing the move as a "beacon to the world that change is upon us".

"It takes courage and vision to stand up for systemic change," he said. "The permanent protection from oil drilling and exploration in Lofoten in Northern Norway should serve as an example for the rest of the world."

The move follows comments last month from BP's vice president for strategic planning, Dominic Emery, who claimed the petroleum giant had "dramatically reduced" its oil and gas exploration over the past decade and that a sizeable chunk of its fossil fuel resources may never come out of the ground.

Ingrid Skjoldvaer, deputy chair of anti-fossil fuel campaign group Folkeaksjonen, described the Labour Party's decision as a "shining symbol of the sustainable future we are fighting for".

"For more than a decade we have been advocating for Arbeiderpartiet to stand on the right side of history and vote to protect one of the world's most vulnerable and unique marine areas against oil and gas development," she said.