Propagation of high-intensity electromagnetic waves in a waveguide structure could initiate nonlinear effects resulting in drastic changes of their spatial and temporal characteristics. We study the modulation instability effect induced by propagation of surface plasmon polaritons in a silver thin-film waveguide. The nonlinear Schrodinger equation for propagating surface plasmon wave is obtained. It is shown numerically that the modulation instability effect can give rise to ultrafast spatial redistribution and longitudinal localization of surface plasmon-polariton wave energy in subwavelength scale. The dependence of plasmon wave dispersion and nonlinear characteristics on metal film thickness is considered. We demonstrate that the use of films with the thickness varying along the waveguide length allows reduction of the generated pulse width and increase of frequency comb bandwidth. The proposed technique is promising for design of ultra-compact (tens of nm) optical generators delivering pulse trains with the repetition rate higher than 1THz.