LONDON, Dec 28 (Reuters) - Euro zone bond yields were mixed but holding near multi-month lows in thin trading conditions on Thursday as markets bet that central banks will soon embark on a rate-cutting cycle as inflation returns towards target.

Germany's 10-year yield, the benchmark for the euro zone, was last up 2 basis points (bps) at 1.921%, edging up from Wednesday's lowest level in more than 12 months at 1.898%. Bond yields move inversely with prices.

Yields at the shorter end of the curve, which is more sensitive to changes in interest rate expectations, were a little lower and also near multi-month lows.

Germany's two-year yield was down 0.5 bps at 2.397%, just above Wednesday's lowest since March of 2.391%.

"The main driving force behind the moves is expectations for rate cuts from the major central banks," said Amanda Sundström, fixed income and FX strategist at SEB.

"Things have been moving quite quickly and I think it will continue until we get new data at the beginning of the year."

Money markets have been quick to add to expectations for rate cuts as inflation has fallen more quickly than forecast.

Traders are now pricing around a two-in-three chance that the European Central Bank begins cutting interest rates at the March meeting, while around 165 basis points of easing is priced for next year.

ECB policymakers have attempted to push back on those expectations but with limited success as headline consumer price inflation in the euro zone came in lower than expectations for the third straight month in November, challenging the narrative that interest rates would remain high through 2024.

Italy's 10-year yield, the benchmark for the euro zone's more indebted countries, rose 3 basis points to 3.521%, just above Wednesday's trough of 3.468%, the lowest since August 2022.

That pushed the spread between Italy and Germany's 10-year yields to 158 bps, close to its tightest level since June.

Meanwhile, Britain's 10-year gilt yield briefly touched its lowest level since April 6 at 3.433%. It was last up 4.5 bps at 3.478%. (Reporting by Samuel Indyk, Editing by Angus MacSwan)