* Bund auction demand could hint at market expectations for ECB
* Central bank expected to announce gradual withdrawal of stimulus
* Ifo survey to provide indication of business sentiment
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
LONDON, Oct 25 (Reuters) - Euro zone government bond yields came off weekly highs on Wednesday ahead of an auction of German 10-year Bunds that could prove an indicator of market sentiment ahead of a key European Central Bank meeting.
Germany's debt agency is set to sell 3 billion euros of 10-year Bunds -- the euro zone's benchmark bonds -- and demand for the sale could give an indication of what investors expect for Thursday's monetary policy decision.
Yields across the euro zone bond market have risen sharply earlier this week on expectations the ECB will announce a reduction in its bond-buying programme, which ordinarily should presage a strong auction.
But lingering doubts on the pace of this withdrawal may cap demand, analysts said.
"The yield level is the most important point for the auction, but I don't think we will see an astonishing result because there is still a chance for a hawkish message from the ECB," said DZ Bank strategist Rene Albrecht.
The ECB is largely expected to signal a withdrawal from extraordinary stimulus when it meets on Thursday as recent economic indicators suggest that the euro zone has broadly recovered from the crisis years of 2010-2012.
The main point of contention now is the pace of the withdrawal. A survey of business sentiment by the Ifo economic institute due out on Wednesday morning could further inform the outlook for the region.
Most analysts expect asset purchases to be trimmed to 30 billion euros a month from 60 billion euros from January for nine months, following recent source-based stories suggesting ratesetters favour a "lower for longer" scenario.
Euro zone yields were a touch lower on Thursday across the curve, but held near recent highs. Germany's 10-year bond yield edged lower to 0.47 percent, just a basis point below the two-week high of 0.48 percent hit earlier this week.
Most other euro zone bond yields were also similarly lower, with analysts suggesting volumes will be muted ahead of the ECB meeting. Southern European government bonds, seen as most sensitive to any tightening of monetary policy, were largely unchanged.
This meant that the gap between U.S. and German 10-year borrowing costs was close to its widest level since June at 195 bps, as monetary policy expectations for the two regions diverge.
While investors expect euro zone ratesetters to largely be cautious about tightening policy, the possibility that U.S. President Donald Trump appoints a hawkish Federal Reserve chief has pushed U.S. Treasury yields above 2.40 percent for the first time in five months.
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(Reporting by Abhinav Ramnarayan)