LONDON, Jan 25 (Reuters) - Germany's 10-year bond yield rose to its highest level since early December as investors waited for the European Central Bank's (ECB) interest rate decision later in the day.

The ECB is almost certain to leave rates unchanged at 4% but market participants will be listening closely for hints about when borrowing costs might start falling.

Germany's 10-year yield, the benchmark for the euro zone, was last up 3 basis points (bps) at 2.362%, the highest since Dec. 4. Yields move inversely to prices.

U.S. bond yields rose sharply after European trading finished on Wednesday after a weak auction for a 5-year Treasury note.

The ECB's decision comes at 1315 GMT (1415 CET) and will be followed by a press conference with President Christine Lagarde at 1345 GMT.

"We don't expect a policy change and are not looking for many surprises," said Mohit Kumar, chief economist and strategist for Europe at Jefferies.

"We expect Lagarde to indicate that it would be premature to talk about rate cuts and the first rate cut around summer would make sense."

Data on Thursday showed that German business sentiment unexpectedly fell in January. The Ifo institute said its business climate index stood at 85.2, down from 86.3 in December.

Italy's 10-year yield was up 4 bps to 3.973%, pushing the gap between German and Italian 10-year yields slightly wider to 156 bps.

The so-called spread, seen as a gauge of investor sentiment towards Italy and the euro zone's more indebted countries, traded at around its lowest in two years at 150 bps earlier this week.

Investors are also looking towards U.S. data, with fourth-quarter gross domestic product and weekly jobless claims figures due later in the day.

Germany's 2-year bond yield, which is sensitive to interest rate expectations, was flat at 2.717%.

Bond yields have risen this year as traders have tempered some of their expectations for heavy and early interest rate cuts this year.

On Thursday, investors saw a roughly 60% chance that the first 25 bp ECB rate cut will come in April. That was unchanged from the start of the week but down sharply from the start of the year when money markets were pricing a 64% chance of the first cut coming in March.

(Reporting by Harry Robertson Editing by Mark Potter)