Oct 10 (Reuters) - Euro zone government bond yields

pared their rise on Thursday after U.S. economic data led

investors to slightly increase bets on Federal Reserve interest

rate cuts.

U.S. consumer prices rose slightly more than expected in

September, but their annual increase was the smallest in more

than 3-1/2 years.

Germany's 10-year bond yield, the euro zone's

benchmark, was up one basis point to 2.26%, after reaching

2.282% earlier in the session, its highest since Sept. 4.

Money markets priced in 46 bps of rate cuts by year-end from

43 bps before the U.S. data.

They also discounted an around 90% chance of 50 bps of

European Central Bank rate cuts by year-end

from 80% right before the data.

ECB policymakers appeared content with the drop in inflation

in the euro zone when they met last month but argued for a

gradual policy easing given lingering domestic price pressures,

the accounts of their policy meeting showed on Thursday.

The "minutes confirm that at the September meeting, the ECB

seemed determined and comfortable to continue its very gradual

pace of reducing monetary policy restrictiveness," said Carsten

Brzeski, global head of macro at ING.

"We are far less certain than financial markets that the ECB

will actually cut rates next week," he added.

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

sensitive to ECB rate expectations, was up 0.5 bp at 2.26%,

after hitting 2.287%, its highest level since mid-September.

Borrowing costs were on the rise on both sides of the

Atlantic before the U.S. data as investors kept pricing in a

patient policy loosening path in the U.S. after Fed minutes from

September's policy meeting were released on Wednesday.

Several ECB policymakers argued their case on Wednesday for

a rate cut next week, while Peter Kazimir was critical about the

expectation of a done deal and Pierre Wunsch was not yet

convinced of such a move.

The ECB's Gabriel Makhlouf said that persistent services

inflation and stronger-than-expected wage growth present upside

risks.

The gap between French and German 10-year yields

- a gauge of the risk premium investors demand to

hold France's government bonds - was last at 77 bps, with Prime

Minister Michel Barnier set to present the budget bill for 2025

later in the session.

According to a note from Citi, investors will closely watch

for details of an expected 60 billion euros ($65.6 billion) in

spending cuts to assess the effort's credibility, the state

funding update for 2024 and initial supply targets for 2025.

The overall picture would impact rating decisions starting

Friday with a Fitch review.

Also, Portugal's 2025 budget will be in focus as the

minority centre-right government has watered down its proposals

for two major tax cuts, aiming to persuade the main opposition

Socialists to allow passage in parliament.

The Portuguese yield spread on 10-year maturities

tightened slightly to 49 bps.

Italy's 10-year government bond yield rose one

bp to 3.57%, and the gap between Italian and German yields

was 130 bps.

($1 = 0.9141 euro)

(Reporting by Stefano Rebaudo, editing by)