(Updates prices at 1040 GMT)

LONDON, Sept 18 (Reuters) - Euro zone bond yields inched

higher on Wednesday but investors were cautious ahead of the

long-awaited Federal Reserve rate decision due later in the day,

which is likely to generate a significant market reaction.

Germany's 10-year bond yield was up 2 basis

points at 2.17%, its highest in a week, though the benchmark for

the euro zone bloc has broadly been trending lower in recent

months as rate cuts by global central banks gather pace.

Moves on Wednesday were kept in check by the Federal Reserve

meeting, the outcome of which will be announced at 2 p.m. EDT

(1800 GMT). The Fed is all but certain to begin its rate cutting

cycle, though traders are uncertain about whether they will cut

rates by 25 or 50 basis points.

Markets currently see around a 65% chance that they will

start with a 50 bp move.

"Given the uncertainty that's still looming, we can expect a

decent market reaction whatever the decision is tonight," said

Jim Reid, global head of macro research at Deutsche Bank, in a

morning note.

"You'd have to go back over 15 years to find such an

uncertain situation this close to the decision. A lot of money

will be made and lost today."

The Fed meeting is the focus for European markets, which

have been highly responsive to data and policy decisions from

the U.S. in recent months. Final euro zone inflation data for

August came in largely in line with expectations, and did little

to move bonds.

Market pricing shows little chance of a European Central

Bank rate cut in October, but a 25 bps cut is fully priced by

December, on top of the cuts in June and earlier in September.

Italy's 10-year yield was a fraction higher at

3.55%, and the gap between Italian and German 10-year yields

was 137 bps.

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

sensitive to European Central Bank rate expectations, was flat

at 2.24%.