Councils invested in Landsbanki when the markets were more stable
About £8m of taxpayers' money could be lost after two councils in northern Lincolnshire invested in failed Icelandic banks, BBC News has learned.
North Lincolnshire Council has £2m invested with Landsbanki and £3.5m in the firm's UK bank, Heritable.
North East Lincolnshire Council said it had £2.5m on deposit with Landsbanki.
A North Lincolnshire Council spokeswoman said: "At this point in time we don't know whether the money is totally lost, partly lost or secure."
She said councils were seeking assurances from the government that their investments would be protected.
"We invested the money in line with the council's approved treasury policy and at a time when markets were much more stable," she said.
"At this point in time we don't know whether the money is totally lost, partly lost or secure and are awaiting confirmation.
"But it does not affect the council's ability to pay staff and creditors."
The Local Government Association (LGA), which represents councils in England and Wales, has sought urgent reassurance from Chancellor Alistair Darling that he will protect local council deposits.
North Lincolnshire Council said: "The LGA has called on the government to extend to local councils, who have prudently managed council taxpayers' money such as ours, the same assurances that money that has been invested in accordance with the law, and the government's own guidance, will be fully protected.
"We are awaiting confirmation from the government to see what arrangements have been made to protect our investment."
Mr Darling said earlier on Wednesday: "I do know the position about local authorities.
"I think they're in a slightly different position [from individuals] in that they are more of an informed investor.
"But this situation is evolving, we are trying to sort the matter out with the Icelandic government."
North East Lincolnshire Council said it had £2.5m on deposit with Landsbanki out of a total of £90m of investments across a spread of institutions. It does not have any deposits with Heritable.
Alan Madin, the council's executive director of corporate services, said: "The council and our treasury advisers are awaiting further information on the support for Landsbanki from the Icelandic government who are aware of the reputational risks should Iceland's second largest bank default on foreign loans.
"It is clear that deposits due in the next few weeks are unlikely to be repaid on the due date but it is too soon to speculate on the size of any ultimate loss of capital.
"A delay in repayment is manageable without impact on council services and the council carries a level of self insurances that would help cushion a loss should any occur."
The LGA said a number of local councils across England and Wales had placed sums in Landsbanki.
"While this may affect some councils financially, we do not expect it to have any impact on local services," said LGA chairman Margaret Eaton.