(adds dropped figure 3 in fifth para)
* Cuts guidance by 3 percent
* Q3 will meet but not beat own guidance
* Cites continued customer volatility
* Shares down as much as 21 percent
(Adds further reaction, updates shares)
By Paul Sandle
LONDON, Oct 6 (Reuters) - British software firm Autonomy said it would cut its full-year revenue guidance by about 3 percent after weaker than expected demand, sending its stock sharply lower.
Shares in the group, whose meaning-based search software is used by multinationals and governments, plunged as much as 21 percent to an eight-month low of 1,464 pence, the largest FTSE 100 faller, after a trading update on Wednesday.
It was trading 17.8 percent lower at 1,523 pence by 1424 GMT.
Autonomy said it expected full-year revenue growth of about 17 percent and said its third quarter would meet but not beat its own expectations. Analysts had pencilled in full-year growth of about 21 percent, according to a Thomson Reuters I/B/E/S poll.
Chief Executive Mike Lynch blamed customer volatility due to the current macroeconomic situation for a cut in the company's revenue forecast of 3 percent.
Analyst Bob Liao at Canaccord Genuity, who rates the firm a "hold", said Autonomy was expected to rebound after one-off events clouded the second quarter, when the group's margin slipped.
"Things have not been coming together as expected," he said. "It throws into question its longer-term growth potential. I'm guessing the downgrade to consensus will be somewhere in the neighbourhood of 6 percent in terms of earnings, and that will extrapolate into 2011 in a higher percentage downgrade."
Goldman Sachs removed the company from its "conviction buy" list, but retained its "buy" rating, saying it believed the stock would be in the "penalty box" in the short to medium term.
"Apart from M&A support and prospects of an accretive acquisition, we believe predictability of growth has become more uncertain in the short term until close rates across the various product lines stabilise," it said in a note.
COMPLIANCE SLOWING
Autonomy's software searches unstructured information, such as e-mails, telephone conversations, documents and video for companies such as BP, Morgan Stanley and Sainsbury's.
Demand has been boosted by tighter regulation, but the group was also hoping for a lift from its marketing software as the global economy recovered.
Standard & Poors analyst James Crawshaw said growth may be petering out for Autonomy's compliance-driven products, while demand for discretionary software remained weak.
"We believe Autonomy will seek an acquisition to stoke its growth engine, but that desperation may lead it to overpay," he said.
Autonomy raised 500 million pounds ($796 million) in February for an acquisition, and Lynch reiterated on Tuesday it wanted to complete a deal in the autumn.
The company said on Wednesday its third-quarter revenue would be around the top of the $206-$211 million guidance it gave in July, short of $216 million expected by analysts, while adjusted earnings per share would be $0.25-$0.26, also missing the Thomson Reuters I/B/E/S forecast of $0.27.
For the year, the company sees organic growth of about 12 percent and pretax profit growth of about 20 percent. (Editing by Sharon Lindores and David Cowell) ($1=.6281 Pound)