UPDATE 1-Martha Stewart loss widens as ads decline

* Q1 loss 31 cents/shr

* Loss includes 13 cents/shr charge related to investment

* Shares flat in premarket trade

NEW YORK, April 30 (Reuters) - Martha Stewart Living Omnimedia Inc (MSO.N) reported a wider quarterly loss Thursday because of falling magazine advertising sales and diminishing returns from an alliance with retailer Kmart.

The results come a week after a management shake-up at the company and soon after it reported a new and lucrative three-year contract for founder Martha Stewart.

The publisher reported a first-quarter loss of $16.8 million, or 31 cents a share, compared with a loss of $4.2 million, or 8 cents a share, a year earlier.

The results include a charge of 13 cents a share related to an investment the company made in crafts company Wilton Products Inc in 2007.

Excluding that charge, the results fell short of analysts' average forecast of a loss of 14 cents a share, according to Reuters Estimates.

Revenue dropped 26 percent to $50.4 million, below analysts' estimates.

Last week, Wenda Harris Millard resigned as co-chief executive. The other CEO, Robin Marino, will no longer hold that title, but will oversee the company's merchandising business. Chairman Charles Koppelman will run the business, while Stewart retains creative control.

Stewart also revealed a new contract that pays her $2 million a year for three years, plus a $3 million retention incentive payment and up to $1.5 million in annual bonus.

The company's shares closed at $3.77 on the New York Stock Exchange Wednesday and were flat in premarket trade Thursday.

(Reporting by Robert MacMillan; editing by John Wallace)