(Updates with afternoon European trading)

LONDON, Dec 30 (Reuters) - Euro zone bond yields dipped

on Monday, edging off near-six-week highs hit at the end of last

week as investors grappled with an uncertain monetary policy and

borrowing outlook for 2025.

Germany's 10-year bond yield, the benchmark for

the euro zone, was last down 3 basis points (bps) at 2.36%.

The move, in mid-afternoon trading in Europe, echoed a

similar fall in the United States where Treasury yields dropped

after data showed a contraction in activity in the U.S. midwest.

U.S. Treasury yields set the tone for borrowing costs around

the world.

The moves lower also appeared to be a result of traders

rebalancing their positions as the end of the year approaches,

and after bond yields have risen steadily in recent weeks.

The German bund yield reached as high as 2.405% on Friday,

its highest since Nov 18.

A strong U.S. economy has limited the amount the Federal

Reserve is expected to cut rates next year, while the euro zone

economy has also shown some minor signs of improvement.

The decline in euro zone business activity eased this month

as the bloc's dominant services industry bounced back to growth,

survey data showed on Dec. 16.

"Real rates are rising primarily for macro reasons," said

Florian Ielpo, head of macro at Lombard Odier Investment

Managers, referencing bond yields adjusted for inflation.

"The improvement in current economic conditions - notably in

China and Europe, against a backdrop of improving U.S.

industrial surveys - has led to a revision of central bank rate

cut expectations."

He added: "The market now only expects 1.5 rate cuts in the

United States in 2025, suggesting a scenario of strong growth

and renewed inflationary pressures."

Italy's 10-year yield was flat at 3.53%, and the

gap between Italian and German bond yields stood

at 116 bps.

Germany's two-year bond yield, which is more

sensitive to European Central Bank rate expectations, was down 2

bps at 2.08%, having hit its highest since Nov. 22, late Friday.

Elections in Germany in February will be a focal point early

next year for investors, who are wondering whether a new

government will allow higher public borrowing to prop up the

flagging economy.

Yield curves have steepened this year - longer-dated yields

have risen more than shorter-dated ones - as economies have been

relatively resilient but cooling inflation has allowed central

banks to cut rates.

Germany's 10-year bond yield has risen around 36 bps in 2024

but the two-year yield has fallen around 30 bps.