Dozens of local councils risk losing hundreds of millions of pounds of taxpayers' money held in Iceland's stricken banks.

Town halls across the country may have to raise council tax and cut services as the repercussions of the collapse of the Icelandic economy broadened into a diplomatic row with Britain.

Alistair Darling, the Chancellor, pledged yesterday to make good all losses suffered by the 300,000 British savers caught by the collapse of Icesave, the online bank that went into receivership on Tuesday.

The move will cost the Treasury about £4.5 billion — and carried an implicit pledge from Mr Darling that he would do the same if other banks collapsed.

The Government also seized control of the British arm of Iceland's Kaupthing bank because it could not honour its obligations to customers.

Mr Darling expressed incredulity that Reykjavik was cold-shouldering British investors.
"The Icelandic Government have told me, believe it or not, they have no intention of honouring their obligations," he said. Britain started legal action yesterday in an effort to recover money belonging to Icesave customers.

The Government used anti-terrorism powers to freeze an estimated £4 billion of British financial assets in Landsbanki, Icesave's parent bank. A spokesman for the Treasury said that the 2001 Anti-Terrorism, Crime and Security Act was invoked as a "precautionary measure".

From The TimesOctober 9, 2008

'A local authority in Scotland risks losing up to £1m invested in a stricken Icelandic bank.

Perth and Kinross Council confirmed yesterday that it had a short-term investment of £1m in Glitnir Bank'