* H1 pretax profit beats market expectations
* Sees 2014 sales growth 'well above' 3 percent
* Says sanctions against Russia will hit business in H2
* Shares up 2 pct (Adds further comments, reaction)
By Paul Sandle
LONDON, Aug 26 (Reuters) - WPP, the world's largest advertising company, said tensions between Russia and the West were likely to dampen merger and acquisition activity, prompting its clients to spend more on their brand image instead.
WPP reported first-half results that were hit hard by the strength of the British pound but stuck to previously announced sales growth and profitability targets for the year.
Its founder, Martin Sorrell, said the situation in Ukraine and the impact of Western sanctions on Russia had replaced the health of the euro zone as the major geopolitical worry.
But he said this increased uncertainty may actually propel brand budgets higher by diverting corporate cash reserves that might otherwise have been spent on takeovers.
"Anxiety is heightened so it will make clients more cautious," he said in an interview on Tuesday. "It's very difficult to see a way through these current problems between Russia and the rest of the world over Ukraine."
But it was possible that, because of the increased uncertainty, "M&A activity is not quite so strong and people will use the money on their balance sheets ... to invest in brand," said Sorrell.
WPP shares were trading up 2 percent at 1,518 pence at 1123 GMT after earlier hitting a seven-week high of 1,269 pence.
Sorrell said business was very strong in Russia in the first half, but he expected it to weaken in the second as sanctions against Moscow start to bite.
Germany, WPP's fourth-biggest market after the United States, Britain and China, could be most affected by sanctions against Russia, he said.
Sorrell has built WPP into the world number one by acquiring companies in the fast-growing digital advertising sector, and was a step ahead of rivals in moving aggressively into faster growing markets in the Asia-Pacific region and elsewhere.
It announced more deals on Tuesday that illustrated a strategy to do more for its clients across all platforms - digital and traditional - by providing services such as analytics.
Its GroupM media buying business bought digital search marketing agency Keyade in France, while its research business Millward Brown snapped up U.S. media analytics provider InsightExpress.
WPP's digital revenues were more than $6 billion last year, and it has set a target of deriving 40-45 percent of revenue from digital in the next five years.
It has also benefited from a failed merger attempt by rivals Omnicom and Publicis - Sorrell says his agencies picked up clients and staff from the two companies while they were wrapped up in the details of the alliance.
The strong pound has taken its toll. WPP's first-half pretax profit of 532 million pounds ($882 million) was 16 percent higher than a year earlier excluding the impact of currency swings but up only 1.5 percent when factoring them in.
But many analysts are opting to focus on the underlying business. Roddy Davidson of Westhouse Securities rates WPP a "buy", saying it would benefit from an improving backdrop for advertising spending.
"We regard its overweight exposure to digital and faster growing markets versus other large agencies as an important differentiating feature," he said.
Sorrell said like-for-like revenue grew in all markets, with the United States, Britain and Asia Pacific strong, helped by growing demand for digital advertising.
Organic net sales in the second quarter rose 4.4 percent, an improvement on 3.8 percent in the first quarter. Sorrell said growth for the year would be "well over" 3 percent. The group had previously guided for growth of at least 3 percent.
Analysts at Numis, who have an "add" recommendation on WPP, said the results were slightly ahead of their expectations, but left their full-year pretax profit forecast unchanged at 1.49 billion pounds due to the impact of the currency swings on profit margins.
WPP, which employs nearly 180,000 people, said its net sales margin for the first half was 13.0 percent. That was in line with its full-year target of a 0.3 percentage point improvement.
$1 = 0.6029 British Pounds Editing by Tom Pfeiffer