Martin Currie Investment Management, based in Edinburgh, has released its 2.37 million holding in Vedanta, a British mining company, after coming under fire from Survival International.
The campaign group is trying to block a Vedanta subsidiary, Sterlite, from mining bauxite on a mountain in eastern India seen as sacred by the 8,000 people of the Dongria Kondh tribe.
Last night Stephen Corry, director of Survival International, described the decision by Martin Currie as a "victory".
The only other investor to have withdrawn after pressure was Norway's government.
Mr Corry said: "By their own admission, Martin Currie have disinvested from Vedanta because of uncertainty over the future of the Niyamgiri project, which is shaping up to be one of the most controversial industrial projects in the world.''
According to the firm's annual report in January, the Vedanta holding in its 174 million Portfolio Investment Trust was valued at 2.37 million, equivalent to 1.4 per cent of the trust.
Scott White, director of corporate communications at Martin Currie, confirmed it had sold its Vedanta shares, trading at about 18 each.
"Martin Currie did hold a small position in Vedanta through management of one of its investment trusts. This has now been sold," he said.
"It is fundamental that we expect companies to behave both within the law and morally.
"We sent a detailed list of questions to Vedanta and spoke with Survival to discuss their claims. We received responses to our questions from Vedanta and had dialogue with Survival.
"The doubts over the issues with the bauxite project … led to exiting the stock.''
Campaigners have also written to governments worldwide as well as local authorities in the UK and companies such as Dundee-based Alliance Trust, Standard Life, Barclays Bank, Abbey National and HSBC, asking them to sell Vedanta shares.
They have contacted the universities of Edinburgh, Glasgow, St Andrews and Aberdeen, which have money in Vedanta through the Universities Superannuation Scheme, which has more than a million shares in the firm, worth about 18 million.
A spokesman for Vedanta said last night he could not comment on Martin Currie's withdrawal. He added: "There has been no displacement of indigenous people, as Survival International claim.''
Viewing complex problems through West's prism of morality
ETHICAL campaigning against governments and businesses is nothing new. These include boycotts against South African goods from the late-1960s, right through to the protests last weekend against high street banks including Royal Bank of Scotland, HSBC and Barclays, who are investing billions of pounds in coal projects, angering climate protesters.
But the ethical investment debate raises uncomfortable questions about whether the affluent West is making moral judgements and applying its own standards to complex situations.
There are also questions over where the line can reasonably be drawn.
Millions of people invest through tracker funds with shares in the FTSE 100 and may not know the background of every firm involved.
Bryan Johnston, the director of Bell Lawrie investment stock brokers in Edinburgh, said: "Without a shadow of a doubt, campaigns such as Survival International have an effect – Shell came under pressure in Nigeria and mining firm Rio Tinto, in particular, in Papua New Guinea.
"Most companies care deeply about their image and are aware of their duties to the environment and the people who are affected by their decisions.
"But what is not fully understood is that someone working in an Indian sweatshop making footballs might value the work as the only source of income for their family. One has to respect different cultures."