It has been revealed some local authorities were warned about the risk of investing in Icelandic banks by international credit ratings agencies earlier this year.

Lancashire is facing the prospect of losing £10m invested with stricken Icelandic bank Landisbanki. Lancashire Police and Fire authorities also had cash invested in Iceland.

Blackpool North and Fleetwood MP Joan Humble said she hoped Treasury intervention would help ease the situation.

She said: "I think it's important to say, at this stage, the money councils have invested in Icelandic banks is not yet lost.

"I hope the money of the councils is protected because after all it is council tax-payers' money.

"I think however this has come as a surprise. The advice from Government to councils has always been to spread their investment and most assumed they would do that among British banks not foreign banks."

The £10m deposited in the stricken Landisbanki bank includes £2.5m from the pension fund, and half a million each for the fire authority and the police authority.

Lancashire, which is the fourth largest local authority in the country, has around £500m currently invested in short, medium and long-term deposits with different Treble A starred banks.

Blackpool South MP Gordon Marsden said: "We have taken absolutely the right steps by freezing Icelandic assets in the UK as a bargaining tool.

"Any sensible authorities must spread their cash so I'm relieved Blackpool doesn't have any exposure in this area."

But Fylde MP Michael Jack claimed councils had been forced to find the highest returns for their cash by looking at foreign banks because government had not funded local authorities properly.

He said: "I think part of the problem does lie at the door of the Government. So I feel a bit sorry for local authorities because the Government has put a lot of pressure on them to derive money from any source.

Lancashire's £10m is a short-term loan due back in December.

Adrian Cutts, executive director of resources for Lancashire County Council, said: "We are a very large council spending over £1.5bn per year. We invest this cash in banks with the highest possible credit ratings, to be repaid when we need it.

"These deposits are spread as widely as possible to minimise risk and we move money between banks every day as part of our routine financial management. We have not taken any money out of a bank before the investment matures as a result of the current global financial situation.

"The nature of financial management, and the extreme financial circumstances globally at present, means that, even though the county council only ever invests in banks with absolutely solid credit ratings, there is always a certain level of uncertainty. This current global crisis is the exception that proves the rule.

"I would reassure taxpayers that we are doing everything we can to minimise the risk to our investments in the current situation."