UPDATE 4-WPP punished for slow response to advertising upheaval

* 2017 net sales down 0.9 percent

* Forecasts 2018 net sales to be flat

* Shares down 14 percent

* To simplify group to support clients better (Releads, adds details)

LONDON, March 1 (Reuters) - Britain's WPP struggled to keep pace with changes in advertising in 2017, with its worst annual sales performance since the financial crisis and a gloomy outlook putting its shares on track for their worst day in 20 years.

The world's biggest advertising group has been hit by consumer goods clients such as Unilever cutting spending and by Google, Facebook and consultants Accenture encroaching on its turf, forcing it to cut its outlook three times in 2017.

"2017 for us was not a pretty year," WPP's founder Martin Sorrell said, adding it would accelerate a plan to simplify the group which employs more than 200,000 people in 112 countries through agencies including JWT, Ogilvy & Mather and Finsbury.

Shares in WPP dropped by 14 percent, putting it on track for its worst day since 1998 and wiping 2.3 billion pounds off its market value. Investors had expected it to echo peers Omnicom , IPG and Publicis in sounding more upbeat about 2018.

The world's leading advertising giants are rethinking their models after growing through repeated acquisitions of agencies which are often run as separate entities and designed to compete with each other to provide the best service.

But with technology changing advertising and consumer goods groups demanding cost savings, clients are increasingly wanting to work with one team who can provide a common proposal for media planning, creative ideas, data and analysis.

"Clients want things to be much more agile, simplified, better and cheaper and that is what we have to respond to," Sorrell told Reuters. "We have been going in that direction but we have to go faster."

A strategy it currently uses for its biggest clients such as Ford and Colgate-Palmolive, where it creates a single team to provide all the services required by that company rather than through multiple agencies, could be rolled out more widely.

Publicis has set up "Chief client officers" but all the holding companies struggle with the fact their staff are traditionally loyal to the agencies such as Ogilvy & Mather, seen as the inspiration for the Man Men TV series.

"We start this new phase of our journey from a position of market leadership, and with total confidence in the enduring value of what we offer our clients," Sorrell said.

CHANGING TIMES?

WPP reported a 0.9 percent drop in 2017 underlying net sales, after predicting a broadly flat outcome in October, with demand particularly weak in North America where net sales fell 3.2 percent. Britain was one of the strongest performers.

For 2018 it said the group's budgets were being set on the basis it would see flat growth for revenue and net sales, with the headline operating margin also flat in constant currency.

That looks particularly cautious when 2018 offers the soccer World Cup, the Winter Olympics, mid-term U.S. elections and a generally more buoyant global economy, factors that would normally boost its sales.

However net sales were down 1.2 percent in January, showing little sign of improvement.

Looking ahead to its longer-term target, WPP also cut a forecast for annual diluted earnings per share growth to 5 to 10 percent, from a previous forecast of 10 to 15 percent.

WPP, which Sorrell built from a two-man operation in a London office in 1985 to one with annual billings of 56 billion pounds ($77 billion), has been particularly hurt by the pressures in the packaged goods sector.

Clients such as Unilever, Nestle and Procter and Gamble are cutting spending as consumers turn to more niche brands, hitting sales.

Unilever is also bringing certain capabilities in-house, such as creating its own content through a new unit. Other clients have also started to make their own content and place it directly on Facebook and Google.

Richard Hunter, head of Markets at Interactive Investor, said cost conscious companies were taking a shorter-term view while there were red flags around the North American region.

"The jury is still out as to whether WPP has suffered due to a cyclical change, or whether the landscape is actually structurally different," he said.

"The general view of the shares as a buy has been in place for some time, although this will come under increasing pressure in the absence of some rather more positive prospects." ($1 = 0.7274 pounds)

(Additional reporting by Gwénaëlle Barzic and Martinne Geller Editing by Keith Weir/David Evans/Alexander Smith)