(Updates in early European afternoon trade)

By Lucy Raitano and Greta Rosen Fondahn

LONDON, Feb 25 (Reuters) - Euro zone benchmark Bund

yields held steady on Tuesday while traders considered a report

that Germany is discussing 200 billion euros ($209.78 billion)

for an emergency defence fund as the country digests its

election result.

Remarks from U.S. President Donald Trump overnight that his

planned tariffs on Canadian and Mexican imports are on schedule

to come into force at the start of March also kept traders on

edge.

Germany's 10-year bond yield - a benchmark for

the wider euro area - was broadly unchanged at 2.47%.

"Bund yields are holding up this morning, diverging from the

U.S. This could be related to Germany's plan to fast-track

defence spending and positioning for 10-year supply tomorrow,"

said Kenneth Broux, head of corporate research, FX and Rates at

Societe Generale.

Benchmark 10-year U.S. Treasury yields were

down 7 basis points (bps) at 4.3232%.

Italy's 10-year yield was down 2 bps at 3.534%.

The yield gap between Italian and German government bonds

was 105.7 bps.

Germany's 2-year bond yield, which is more

sensitive to European Central Bank policy rates, edged down for

a fourth day. It was last down 1.5 bps at 2.07%.

Traders have upped their bets for ECB cuts, and now expect a

further 81 bps of easing this year, compared to about 71 bps

last Wednesday.

Investors on Tuesday eyed speeches from ECB policymakers

ahead of the central bank's monetary policy meeting next week,

where it is widely expected to cut rates for a fifth straight

time.

The ECB has room to cut its interest rates further if

inflation eases to its 2% goal this year as it expects, ECB

policymaker

Joachim Nagel said

on Tuesday, adding that the outlook for prices was

"encouraging".

The

German economy

, Europe's largest, shrank by 0.2% in the final quarter of

2024 compared with the previous quarter, the statistics office

reported on Tuesday, confirming a preliminary reading.

($1 = 0.9534 euros)