Councils around Britain have deposits with the failed Icelandic banks
Fears are growing that some local government workers may not be paid this month, because councils have payroll tied up in failed Icelandic banks.
Council leaders are understood to have asked the government to help tide them over the current financial crisis.
About 100 councils in England, Scotland and Wales have deposits in collapsed Icelandic banks worth £842.5m.
Council leaders are to meet the Icelandic ambassador next week to seek assurances over their investments.
They plan to press the government in Reykjavik to ensure that deposits held by UK councils in the now nationalised Icelandic banks are fully repaid.
Most of the money invested by local authorities in Icelandic banks is over the longer term, although some councils deposit payroll money to earn interest - money which is now out of reach because of the collapse of Iceland's banks.
Talks are also continuing between the British Treasury and Icelandic officials over frozen UK deposits held in the banks.
Councils affected want the government to tide them over by allowing them to keep the revenue from business rates, which they normally pass onto government first.
Unions are watching with concern and want to know how many workers could be affected.
The Local Government Association (LGA), which represents councils in England and Wales, said all councils held reserves and in the majority of cases there would be no impact on staff pay or services.
The government has ruled out any large-scale bail-out of councils, instead promising assistance to those facing severe short-term difficulties.
The LGA said the meeting with the Icelandic ambassador would take place next week.
It wants taxpayers' money to be a top priority when repayments are made, and says if it fails to win assurances from the ambassador, it will take its case directly to the Icelandic government.
It insisted councils had not been "reckless" with taxpayers' cash by depositing it in Icelandic banks.
The UK chancellor has said all UK private accounts affected by the Iceland bank crisis will be protected.
A Treasury delegation, which includes officials from the Bank of England and the Financial Services Authority, is in Reykjavik trying to establish a claims procedure for British depositors to get their money back as soon as possible.
The talks are expected to last all weekend and the early signs are that significant progress has been made.