Sharp council tax rises may be needed in the next few years to fund housing and education for immigrant families, says the Local Government Association.
The LGA says official figures on migration are grossly inaccurate
The LGA, which represents local authorities in England and Wales, says rises of 6% on top of inflation-related increases may be needed in some places.
It says councils do not get enough cash to fund the services because official figures under estimate migrant levels.
But ministers say funding is fair and based on the best figures available.
The claims follow Home Secretary John Reid's call for a migration advisory committee to recommend an "optimum" level of immigration.
He is expected to flesh out his ideas in a speech on Wednesday.
LGA chairman Sandy Bruce-Lockhart says 25 councils claim inaccurate migration figures mean they do not have enough funding.
He is asking Mr Reid if he has requested more accurate immigration figures to be compiled and, if so, when they will become available.
Figures on migration to the UK are provided to the Home Office by the Office for National Statistics.
But the decision on how much money to allocate each local authority to pay for services to immigrant families, based on these figures, is taken by the Department for Communities and Local Government (DCLG).
In a letter to Mr Reid, Lord Bruce-Lockhart says: "Working migrants have become an invisible population whose children need school places, who need to be housed appropriately and in some cases need social services. Official statistics have failed to reflect this.
"Unless accurate, up-to-date figures on migration are produced so that the proper funding to councils can be reflected, this could pose severe problems in the future as services get cut, or council tax has to rise disproportionately for growing migrant population."
Lord Bruce-Lockhart cited the example of Slough, Berkshire, where officials figures put the number of immigrants far lower than the number the local authority believes has settled in the area.
Council chiefs in Slough say a 6% council tax surcharge could be needed over the next five years.
Official estimates say 1,500 international immigrants settled in Slough in 2004 - a net increase of only 260 for the town's population.
But there were 9,000 new National Insurance registrations in the town in the 18 months up to last October - only 150 of which were for British nationals.
It is unclear how many of those newly registered people are still in the area and the Department of Work and Pensions says some may have lived elsewhere and just registered in the town.
The Home Office said it did not comment on private correspondence.
But a DCLG spokeswoman said: "We are working with the best figures we have got to make sure the grants that are given to local authorities are fair and based on the best possible data."
The Statistics Commission watchdog warned early last year that figures on international migration needed to "improve markedly", a view shared by many experts.
John Salt, from University College, London, who advises the Home Office on migration, said the current figures were only a sample.
"The reality is that we don't really have a satisfactory measurement of the number of people that are coming to live in the UK," he told BBC News.
Habib Rahman of the Joint Council for the Welfare of Immigrants said the LGA was right to demand transparency.
"A good place to start in establishing this transparency would be a regularisation scheme which would tell us in which communities and which sectors the UK's half a million irregular population [illegal immigrants] is living and working," he said.
Mr Rahman said it should be recognised that migrants made many local services possible by working for local councils.
In his letter, Lord Bruce-Lockhart also asked Mr Reid to indicate what the government's policy would be towards Romania and Bulgaria, which are due to join the EU next year.
He said Britain was one of only three existing EU countries to allow unlimited immigration from the last wave of countries to join the union, including Poland and the Czech Republic.