Euro zone bond yields held steady on Tuesday, a day before a decision on interest rates from the U.S. Federal Reserve, which could impact expectations for what step the European Central Bank might take with monetary policy.

German 10-year yields, which serve as the benchmark for the wider euro zone, were down 1.4 basis points at 2.106% in midday trading. Bund yields have fallen nearly 20 basis points since the start of September alone.

Two-year Schatz yields, the most sensitive to changes in expectations for ECB policy, were up nearly 1 bp at 2.185%.

ECB chief economist Philip Lane said on Monday a gradual approach to easing monetary policy will be appropriate if the incoming data are in line with the central bank's baseline projections.

"We should retain optionality about the speed of adjustment," he said.

Peter Kazimir, Slovakia's central bank chief, was however keen on shutting the door on October, arguing in a blog post on Monday that quick cuts were risky and the ECB needed more hard data proving that inflation is indeed coming back to target by the end of 2025.

Traders think the ECB, which cut rates last week, is leaning more towards another 25-bp cut at the December meeting, rather than October, while U.S. markets shows investors are placing a near-70% chance the Fed will cut rates by 50 bps on Wednesday.

"Until the Fed meeting, we expect euro rates to trade sideways. The spillovers from a 50-bp cut would have some bullish spillovers to the Bund curve, including more steepening, and will also likely increase pricing for an October cut. But overall the scope for lower Bund yields is limited," ING strategist Benjamin Schroeder said.

Italian 10-year yields were down 3 bps at 3.45%, leaving the premium over Bunds 1.4 bps narrower at 133.6 bps.

German investor morale darkened more than expected in September, the ZEW economic research institute said on Tuesday, as the assessment of the economic situation continued its downward trend.

The economic sentiment index fell to 3.6 points - the lowest since last October - from 19.2 points in August. Analysts polled by Reuters had pointed to a reading of 17.0.

"The hope for a swift improvement in the economic situation is visibly fading," said ZEW president Achim Wambach.

(Reporting by Amanda Cooper; Editing by Andrew Heavens, William Maclean)