By Naomi Tajitsu

WELLINGTON (Reuters) - New Zealand dairy giant Fonterra Co-operative <FSF.NZ> said on Friday it had suspended operations in Sri Lanka after the world's largest dairy exporter faced product bans, court cases and angry demonstrators over its milk products in the country.

Sri Lanka's food safety authorities have said they found high levels of the agricultural chemical dicyandiamide (DCD) in two batches of milk powder it tested, an accusation that Fonterra has vigorously disputed.

This week Fonterra was banned by a Sri Lankan court from selling products, and its announcement was made as televised footage showed groups of protestors shouting negative slogans in front of the company's offices in Sri Lanka.

That followed protests by 100 members of the National Freedom Front, a hardline nationalist political party in President Mahinda Rajapaksa's ruling coalition, on Thursday. A Sri Lanka state institute said it would test all milk powder in the market.

"The temporary suspension is the right thing to do. It is a precautionary measure to ensure our 755 people working there are safe," Chief Executive Theo Spierings said in a statement.

"Recent events, however, have made it difficult to maintain day-to-day operations, and we need to get them resolved."

Four of Fonterra's top officials face contempt of court charges, accused of not adhering to an earlier ruling that banned sales and advertising of all Fonterra milk products.

Fonterra has had a presence in Sri Lanka for around 50 years, and its Anchor brand commands a 65 percent market share of the country's milk powder industry.

In New Zealand, Sri Lanka's actions are widely seen as a move to pressure Fonterra and promote local dairy farmers.

"There clearly are industry politics going on over there," said Keith Woodford, professor of Farm Management and Agribusiness at Lincoln University.

"There's no doubt that Sri Lanka wishes to have its own dairy industry."

Sri Lanka is a top-10 importer of New Zealand dairy products, with roughly $196 million (125 million pounds) of the country's total milk powder imports of around $300 million coming from New Zealand last year. The majority is supplied by Fonterra.

The country has been trying to promote consumption of local fresh milk to stem capital flows out of the country and increase the viability of domestic farmers.

Sri Lankan opposition follows a global food scare after Fonterra said that some of its products could contain a bacteria that can cause botulism. Its products have been removed from shelves in countries from China to Saudi Arabia, while other countries have restricted imports.

(Reporting by Gyles Beckford and Naomi Tajitsu; Editing by Kim Coghill)