Councils have millions of pounds in nationalised Icelandic banks with no guarantee of retrieving the cash.

Town hall leaders from across England and Wales are seeking assurances from the Chancellor their investments are safe.

Yesterday, Alistair Darling promised savers would not lose their money invested with Landsbanki, Heritable Bank or Icesave but made no mention of businesses or local government, who he said should have been more informed of risks than average savers.

He told the House of Commons: “What we can do is make sure that we look after the retail depositors – the ordinary men and women who put in their money, and might not have fully appreciated that Icesave is a branch of a foreign bank and not incorporated in the UK.

“I understand the position of local authorities, but they are in a slightly different situation, in that they are a more informed investor. However, as I said earlier, the situation is evolving; we are trying to sort the matter out with the Icelandic government.”

Kent County Council alone has £50 million deposited in Landsbanki as well as Glitnir Bank.

The Local Government Association (LGA) insists that councils have invested taxpayers’ money “prudently” and want assurances it will be protected.

Cllr Margaret Eaton, chairman of the LGA, said: “We are today seeking an assurance from the chancellor that councils’ assets will be protected in the same way as personal assets.

“Town halls invested in Landsbanki as a reputable bank with a solid credit rating.”

Vital public services will be kept running despite the financial crisis, the LGA said, and councils deposit money in a wide range of banks and other financial institutions to make sure that any risk is spread.