Council tax payers may see bill rises and service cuts if there is not a big cut in waste dumped at landfill sites, the Local Government Association says.
Recycling improvements have been outweighed by increases in waste
It follows a National Audit Office report for England warning councils were in danger of missing EU targets to cut the amount of waste at landfills.
The NAO said councils could face fines of £40m a year by 2010, rising to £205m a year by 2013.
The watchdog called for immediate action, such as more recycling.
NAO head Sir John Bourn said: "No-one should be in any doubt of the scale of the challenge involved.
"The weight of evidence shows that disposing of biodegradable waste in landfill sites is harmful to the environment, and if we are to substantially reduce our reliance on landfill then there really is not time to waste."
Improvements in recycling by households have so far been outweighed by rises in the amount of waste.
And the Local Government Association warned that unless "bold reforms" were made, local authorities faced "fines of up to £150 per tonne - forcing another burden on the tax player and the environment."
The NAO's report says that to meet European targets for 2010, a reduction of at least 3.5m tonnes of biodegradable waste sent to landfill was needed. A reduction of a further 3.7m tonnes was needed by 2013.
It estimated that if no further action was taken beyond that planned, local councils would miss the 2010 target by around 270,000 tonnes - equivalent to waste produced by some 225,00 households.
The councils could be 1.4m tonnes short of the 2013 target - equivalent to the waste of around 1.2m households.
The NAO said the government planned to penalise local councils who failed to make the required reductions under the Landfill Allowance Trading Scheme.
This was introduced to help local authorities comply with the EU Landfill Directive.
Failure to meet these targets could also result in substantial fines imposed on the government by the EU.
Britain currently sends around 75% of its waste to landfill - more than any other EU member state except Greece.
The Department for the Environment, Food and Rural Affairs gave local authorities £336m between 2002/3 and 2005/6 to encourage recycling and composting.
But a 23% rise in the recycling of household waste has been outweighed by an increase in waste produced.
Defra forecasts a recycling figure of around 40% would be needed to meet the EU targets - but the NAO report suggests this would be hard to achieve.
Councils have also faced problems in securing funding and planning permission which have contributed to delays in building waste treatment plants.
The NAO urged Defra to help the 25 authorities sending the largest amounts of waste to landfill to develop new treatment facilities, such as plants which convert waste to energy.
In response to the NAO report, the LGA launched a four-point plan to crackdown on "spiralling levels of unrecycled waste," which suggests councils should be able to charge households directly for the waste they throw away.
It also suggests "strong action" on disposable single-use items such as disposable nappies.