* Merger of equals founders over power struggle - Levy
* Tax, regulatory issues had held up closing
* Analysts see tougher times, M&A ahead for ad sector (Adds reaction)
By Anjuli Davies, Soyoung Kim and Leila Abboud
LONDON/NEW YORK/PARIS May 9 (Reuters) - The $35 billion merger of U.S.-based Omnicom and France's Publicis collapsed on Friday after a battle for control destroyed plans to create the world's largest advertising agency.
The deal, heralded in July as a merger of equals that would enable the two agencies to compete more effectively in the digital arena, foundered on issues ranging from its complex tax structure to the firms' divergent cultures. The two sides were also losing major work - more than $1.5 billion in the past month alone - and did not want to let the uncertainty continue.
"I have not been able to convince John that balance is balance," Publicis Chief Executive Maurice Levy said of his counterpart John Levy.
"Omnicom wanted their people to fill the CEO, CFO and general counsel jobs," he told Reuters. "I thought that went too far. I was not ready to cede on this point."
Omnicom CEO Wren said the two sides had failed to find a way past the strong corporate cultures that existed in each company.
The dispute over who should be CFO would have influenced whether the new company inclined towards a centralised structure to manage costs, which Publicis argues has driven its higher margins, or Omnicom's more devolved approach.
Neither company will pay a termination fee, and they will split the costs of the failed deal, such as legal fees.
"There was no one factor," Wren, 61, told Reuters.
"There are a lot of complex issues we haven't resolved. There are strong corporate cultures in both companies that delayed us for reaching an agreement. There was no clear finish line in sight, and uncertainty is never a good thing when you are in the personal service business."
With the deal off the cards, analysts predicted a period of turmoil ahead for the industry as Publicis and Omnicom seek to re-engage with clients after recent business losses.
One global consultant who advises clients on media spend told Reuters that agencies within Martin Sorrell's WPP, which will keep its crown as the world's largest advertising agency, had won a lot of work of late by cutting fees.
He advised existing clients of Publicis and Omnicom to use the uncertainty to negotiate better terms. He noted that some client work coming up for review in the coming months would also pitch agencies owned by the two firms against each other.
Publicis shares were down almost 1 percent, while Britain's WPP was flat. Smaller French player Havas, seen as a takeover target, jumped 3.4 percent.
"We see the consequences for the agency space as negative as, shorter-term, it is likely to lead to a more competitive environment and, longer-term, it dashes the hopes that the merger would lead to an easing of pressures in staff costs and client fees," wrote Liberum analyst Ian Whittaker.
Some analysts also said further deals could crop up involving perhaps fourth-largest agency Interpublic and Japanese advertising group Dentsu.
Sorrell told Reuters the failure of the deal had turned into a soap opera.
"You now have the charade of them trying to say we're just as well off apart as we were together, which begs the question of why spend a couple of hundred million dollars to prove that being together didn't work. It was ill thought through."
Although Levy still believes Publicis should be bigger to cope with the way technology is changing the ad business, he demurred on whether the group needed a big acquisition.
"For now, our goal is simple - to accelerate our strategic plan," he said.
Publicis and Omnicom had justified the marriage as a way to provide scale and capital to cope with technological forces reshaping the industry.
Wren and Levy, who toasted the tie-up with champagne in Paris last summer, had said it would enable them to better compete with the likes of Google Inc and Facebook Inc , which dominate digital advertising, an area that accounts for nearly a quarter of global marketing spending.
The planned merger had called for a 50-50 ownership split of the equity in the new company, Publicis Omnicom Group, with Wren and Levy serving as co-CEOs for 30 months from the closing.
Signs of trouble between Omnicom and Publicis appeared in late April when Wren disclosed hurdles to getting the deal's tax structure approved by regulators in Europe. He ominously said he could not predict when the deal would close and said there was "no Plan B" if the tax issues were not resolved.
Soon after, media outlets reported that the fight over the leadership of the future group had frayed relations between the two sides. One person on the French side said Omnicom appeared less willing to compromise in recent weeks than Publicis, which was trying to save the deal.
Levy had previously postponed retirement plans as succession at Publicis remained an open issue prior to the deal. Those questions are likely to come to the fore again.
Brian Wieser, a senior analyst at Pivotal Research, said that though the potential merger was handled badly, there was still pressure on ad agencies to strike deals as they were squeezed by clients looking to cut costs.
"M&A and consolidation is still on the table, but now there are more potential flavours," he said.
He said Publicis was still a more likely a buyer than a seller, and Interpublic a more likely seller.
"The question is not whether or not there will be bids, but at what price Interpublic would sell, especially considering it should have a strong year on an operating basis." (Additional reporting by Jean-Michel Belot in Paris, Aman Shah in Bangalore, Jennifer Saba in New York, and Sophie Sassard and Kate Holton in London. Writing by Leila Abboud and Kate Holton; Editing by Eric Walsh, Richard Chang, Ken Wills and Will Waterman)