(Updates in late European trading)

By Greta Rosen Fondahn and Harry Robertson

Dec 12 (Reuters) - Euro zone government bond yields rose

on Thursday after the European Central Bank (ECB) cut interest

rates by 25 basis points as expected but President Christine

Lagarde stressed the fight against inflation was not over.

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

the euro zone, briefly dipped after the ECB's decision, but was

last up 4 basis points (bps) at 2.17%. Yields move inversely to

prices.

The ECB cut rates for a fourth time this year, with money

markets having fully priced in the 25 bp reduction to 3% ahead

of the decision, while expectations for a larger cut had been

close to zero.

The central bank kept the door open to further easing ahead

as inflation closes in on its goal and the economy remains weak.

Yet Lagarde said in the press conference that the central

bank remained vigilant about inflation.

"We are getting closer, but we are not done."

She said some inflationary measures are still relatively

high, meaning "you have to be cautious".

Germany's two-year yield, which is sensitive to

ECB rate expectations, was last up 2 bps to 1.986%, compared to

1.954% before the ECB's announcement.

"She (Lagarde) was pretty hawkish today, leaning against

pricing of a larger than 25 bp cut for January," said Arne

Petimezas, a research director at AFS Group in Amsterdam.

"She said that the neutral rate wasn't discussed, and

clearly drew the line with needing to see lower services

inflation." The neutral rate refers to the level at which

borrowing costs neither stimulate nor dampen the economy.

Investors were also digesting data which showed U.S. weekly

jobless claims rose more than expected last week, although it

only had a fleeting impact on euro zone bonds.

Separate data showed U.S. producer price index inflation

rose more than expected in November.

Italy's 10-year yield was up 8 bps to 3.284%,

after hitting a 28-month low of 3.162% the day before.

Emmanouil Karimalis, rates strategist at UBS, said the fact

the ECB expects inflation to still be very slightly above its 2%

target in 2027 may have led to some selling of longer-dated

bonds.

The spread between Italian and German borrowing costs

- a gauge of the risk premium investors demand to

hold Italian debt - was 5 bps wider at 111 bps, widening

slightly from before the decision. It hit 104.50 bps earlier

this week, its lowest since October 2021.

The yield gap between French government bonds and safe-haven

German Bunds held steady at 77 bps. President

Emmanuel Macron set himself 48 hours to name a new government on

Tuesday.

The Swiss National Bank cut its interest rate by 50 basis

points on Thursday, its biggest reduction in almost 10 years.