Kent County Council (KCC) has vowed to "fight to get every single penny back" of its £50m which it had deposited in collapsed Icelandic banks.
The £50m figure makes up about 10% of the money that the council had invested on the advice of financial consultants.
The Local Government Association (LGA) has asked for councils to receive the same protection as personal savers.
Gordon Brown said he was considering action but the government was not offering to guarantee council deposits.
Nick Chard, KCC cabinet member for finance, defended the decision to use Icelandic banks, saying the investments were made on the basis of sound professional advice.
"We work under very clear guidelines," he said.
"We employ professional advisers who use the Three Ratings agency who, up until last week, were still rating these Icelandic banks very highly.
"We acted completely properly, we've used professional advisers and we have been encouraged by central government to make sure that council taxpayers' money works well, and that's exactly what we've done.
"We have followed the protocols absolutely to the letter."
He said KCC services would not be affected.
Councillor Mike Eddy said £16m came from the staff pension fund, £8m was school reserves and £2m was Kent Fire Authority money that the council was administering.
The rest of the £50m was made up of council tax and government grants, he added.
Canterbury council had £6m invested, with £4m in Heritable and £2m in Glitnir.
Dover council, Tonbridge and Malling council, and Sevenoaks council each had a £1m deposit with Landsbanki. The councils said services would not suffer.
Thanet council said it had withdrawn deposits from Icelandic banks and Dartford council said it had never invested in them.
A Dartford council spokesperson said: "The vulnerability of Icelandic banks has been highlighted by our advisers for the past two years."
Deposits from more than 100 councils across England, Wales and Scotland could be at risk, the BBC has learned.