Almost 100 councils are known to have deposited money in Icelandic banks
Local authorities have not been "reckless" in investing more than £840m with Icelandic banks that have now failed, the government has said.
Deposits from more than 100 councils could be at risk, the BBC has learned.
Ministers have promised "case-by-case" help in England and Wales, but say in Scotland the issue will be dealt with by the Holyrood administration.
Gordon Brown said he was considering "further action", but the government is not offering to guarantee the deposits.
The prime minister told the BBC that the Icelandic authorities' handling of accounts had been "effectively illegal" and "completely unacceptable".
The government has frozen the UK assets of Icelandic bank Landsbanki, saying local authorities will benefit from this.
But Iceland's prime minister, Geir Haarde, said it was "not very pleasant" to have laws designed to deal with terrorists used against his country.
So far local authorities in England, Wales and Scotland have revealed that they have deposits worth £842.5m in total.
The figure is £946.8m when investments by police authorities and Transport for London are added.
Treasury Ministers Stephen Timms and Ian Pearson and Local Government Minister John Healy held talks with the Local Government Association, which represents councils in England and Wales.
In a joint statement afterwards they said: "Government and the LGA agreed that there is no evidence of recklessness by local authorities."
They added: "We will judge what's appropriate on a case-by-case basis but, in previous situations, support has included helping local authorities restructure their financial priorities, providing additional expertise and capitalisation of expenditure."
James Purnell, the Minister for Work and Pensions, said the government's priority was to make sure that the services provided by local authorities were not affected by the collapse.
"We met with the Local Government Association and have been discussing this with councils, and we've agreed that we want to work together obviously to protect service levels - but this is a complicated situation.
LARGEST CONFIRMED DEPOSITS
Kent County Council, £50m
Nottingham City Council, £42m
Transport for London, £40m
Norfolk County Council, £32.5m
Dorset County Council, Hertfordshire County Council, £28m
Barnet Council, £27m
Somerset County Council, £25m
Hillingdon Council, £20m
Neath Port Talbot Council, £20m
Westminster City Council, £17m
Brent Council, £15m
"We've agreed that we will work with them over the next few days, and that is the right way of doing it, making sure we get a proper answer."
A Treasury spokesman said any assistance for Scottish councils would come from Holyrood, as local authority matters are devolved.
According to Britain-wide figures acquired by the BBC, Kent County Council has the largest deposit, worth £50m.
Nottingham City Council has invested £42m, while Transport for London has £40m deposited in one of the affected banks.
The Conservatives have warned that town halls could face a "massive financial shock" and be forced into council tax hikes or cuts in local services.
"They are not going to find it easy in the short term," shadow communities secretary Eric Pickles said.
He added: "We need to look at the number of authorities that will be facing a cash-flow problem - some have their payroll on this, for others it's in terms of long-term investment."
The Lib Dems said the money at stake was "essential" for delivering local services and urged ministers to "make clear" how such funding would be protected.
But councils say they have followed Treasury advice by investing surplus money to deliver the highest return for taxpayers.
The LGA insisted all those involved had enough money to ensure frontline services should not be affected.
But it wants the same protection for councils as has been given to personal customers of IceSave and other failed Icelandic banks.