LONDON, Dec 13 (Reuters) - Euro zone bond yields fell on Wednesday as investors waited for the Federal Reserve's latest interest rate decision, with weak economic data from Britain and the euro zone bolstering bets that central banks will soon cut borrowing costs.

Germany's 10-year yield, the benchmark for the bloc, was last down 5 basis points (bps) at 2.181%, not far off a seven-month low of 2.166% touched last week. Yields move inversely to prices.

British economic data was weighing on UK bonds and spilling over to euro zone markets, said Peter Schaffrik, chief European macro strategist at RBC Capital Markets.

Figures showed that the UK economy shrank 0.3% in October from a month earlier, below economists' expectations for a zero growth reading. Britain's 10-year bond yield was down 9 bps at 3.876%.

"This morning it's really - it was the case yesterday already - mainly about the UK (bonds) outperforming," Schaffrik said.

Italy's 10-year bond yield was last 6 bps lower at 3.954%. It hit a 10-month low of 3.917% last week.

Althea Spinozzi, fixed income strategist at Saxo Bank, said data that showed euro zone industrial production slumped again in October was also boosting bonds.

"Fears of a recession are deepening, and speculations that the ECB will need to tilt dovish to support the economy are increasing," she said. "Bond futures are pricing for five rate cuts by the end of next year."

Jussi Hiljanen, rates strategist at SEB, said a strong U.S. 30-year bond auction on Tuesday was another factor contributing to the rally.

Euro zone bond investors are keeping a close eye on the fiscal situation in Germany after a court ruling threw the government's budget plans into disarray.

Government sources told Reuters on Wednesday that the coalition had agreed on a budget for 2024. Officials said the government would plug a hole through savings and subsidy cuts, allowing it to stick to debt restrictions next year.

Germany's two-year bond yield was down 3 bps at 2.698%, while Italy's was 2 bp lower at 3.324%.

Investors think the Fed is almost certain to leave interest rates in the 5.25% to 5.5% range at 2 p.m. ET (1900 GMT). They will scrutinise the so-called dot plot, which charts officials' views of where rates are likely to stand over the next few years.

Market participants in the U.S. and Europe are betting that the Fed and European Central Bank will slash interest rates by more than 100 bps each next year, after large drops in inflation in recent months.

The ECB and Bank of England set interest rates on Thursday and are also expected to hold rates steady, at 4% and 5.25% respectively.

Wagers on rate cuts have driven a momentous rally in global bonds since the start of November, but push-back from officials at the central bank meetings could reverse some of those gains.

"We do think there's a decent chance that we do get a bit of a turnaround, particularly if the central banks don't embrace the market pricing," Schaffrik said.

The gap between Germany and Italy's 10-year bond yield was last slightly narrower at 176 bps. (Reporting by Harry Robertson; Editing by Sharon Singleton and Alex Richardson)