UPDATE 1-US RATE FUTURES-Trim gains as Dec ISM climbs

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CHICAGO, Jan 3 (Reuters) - U.S. short-term interest rates trimmed early gains on Wednesday, lowering the implied chances of a Federal Reserve rate cut in the first quarter after a stronger-than-expected reading on December manufacturing.

Implied chances of a Fed cut by March FFJ7 fell back to the overnight level of 12 percent from as high as 18 percent in early trading.

Futures are fully priced for the Federal Open Market Committee to hold rates steady at 5.25 percent at its January 30-31 meeting.

The Institute for Supply Management said its December index of manufacturing rose to 51.4, reversing November's decline and confounding ideas that the report would show contraction in the factory sector for a second straight month by holding under 50.

"For the Fed it's a small piece of data, but everything else being equal this would make them hold off from a cut," said Robert Macintosh, chief economist at Eaton Vance Management in Boston.

The ISM employment component rose marginally but at 49.7, was below 50 for the third month of the past four.

Rate futures prices have scaled back the implied prospects for 2007 Fed rate cuts over the past week. The market is now not especially confident that a cut will come in the first half of the year.