Jan 30 (Reuters) - Euro zone government bond yields

edged lower on Thursday, ahead of a European Central Bank policy

meeting which is widely expected to cut rates by 25 basis points

and keep the door open to further policy easing.

While ECB President Christine Lagarde is unlikely to commit

explicitly to more cuts, she is likely to argue that the

direction of policy remains clear and that the risk of a trade

war with the United States could further sap weak growth.

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

benchmark, fell 1.5 basis points (bps) to 2.56%.

U.S. 10-year Treasury yields dropped 3.5 bps to

4.52%, in early London trading. They reversed an earlier rise on

Wednesday after Federal Reserve Chair Jerome Powell said he

expects to see further progress on inflation.

Money markets priced in a 94% chance of a 25 bps ECB rate

cut on Thursday and a deposit facility rate at 2.1%

at the end of 2025 from the current 3%.

Germany's two-year bond yield, more sensitive to

ECB rate expectations, was down 2 bps at 2.25%.

Italy's 10-year yield was 0.5 bps lower at

3.65%. The gap between Italian and German yields

-- a market gauge of the risk premium investors demand to hold

Italian debt -- stood at 105.5 bps.

The yield spread between OATs and Bunds fell

0.5 bps to 74 bps as French budget talks teetered on the brink

of collapse on Wednesday.

The spread widened to around 90 bps, its highest since 2012,

in mid-January and end-November amid fears that France would be

unable to cut its growing budget deficit.