Six councils in Wales could be facing service cuts after receiving below inflation raises in their budgets
Councils in Wales say they are facing at least five years of "severe financial pain".
Local authorities will receive increases in their funding next year ranging from 1% to just over 3%, the assembly government has announced.
But councils say they will have to make tough decisions on services and jobs.
Local Government Minister Brian Gibbons said councils faced a challenging climate, but pledged to reduce funding complexity and bureaucracy.
A tight settlement could affect local authority services, which include education and refuse collection, street lighting and leisure centres.
The Welsh Local Government Association (WLGA) said the announcement confirmed that councils were "facing a period of severe financial pain and service delivery pressure which will last at least five years".
Councils are facing huge pressures within social care, education, housing transport and waste... and the stark reality is that not all areas can be protected
John Davies, Welsh Local Government Association
Pembrokeshire councillor John Davies, leader of the WLGA, said the it gave councils "some very tough and difficult choices".
Mr Davies said councils had set record low levels of council tax rises over the past three years and would try to keep rises at a "reasonable" rate this year.
'Very difficult decisions'
But he added: "However, councils are facing huge pressures within social care, education, housing transport and waste which will require difficult resource prioritisation and the stark reality is that not all areas can be protected."
Mr Davies said councils would have to make "very difficult decisions around service cuts and potential job losses around their workforces" and "exhaust every option for increasing efficiency, collaboration and new service models".
But he said the scale of the challenge was "daunting". The assembly government said there would a "net cash increase" to councils of 2.1%, taking into account transfers of existing grants.
Working together we can address the very real difficulties ahead and this settlement is a good starting point
Local Government Minister Brian Gibbons
Dr Gibbons said: "This increase is significantly above current and projected levels of inflation.
"It clearly demonstrates the assembly government's commitment to protect and sustain the key public services that local authorities deliver to the citizens in what is a very difficult economic environment".
He said the floor of 1% would "ensure that all local authorities receive a minimum level of increase".
He added: "Working together we can address the very real difficulties ahead and this settlement is a good starting point."
Cardiff councillor Rodney Berman, who speaks on finance for the WLGA, said this year's settlement would be "as good as it gets", and "much worse will follow between 2011 and 2014".
He called the deal "by far the lowest annual lowest increase for 10 years, with the potential for significant cuts to follow".
Conservative local government spokesman Darren Millar said: "Nobody wants frontline services to suffer as a result of this settlement but I find it hard to imagine how current levels can be sustained on this settlement.
"With councils across Wales looking to cut jobs and services, once again local authorities are being forced to bear the brunt of the assembly government spending squeeze."
Last month, Powys council said it was facing a deficit of £33m over the next five years, which will put its services under mounting pressure.
In June, Cardiff council sent letters to staff "reminding" them of its voluntary redundancy scheme as it said it would have to cut £21m from its budget.
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