When four Icelandic banks went into administration four weeks ago, it quickly became apparent that a number of councils that had invested in the high-interest accounts stood to lose significant amounts of money.

More than 120 councils have £1 million locked up in Icelandic banks with no immediate prospect of getting some, let alone all, of their money back. But now local finance officers, bruised by accusations of reckless investing, are advising authorities to put their reserves and receipts in much safer deposit accounts.

This month, town halls have invested £10 million in Treasury accounts as confidence in banks has plummeted. Town halls generally invest relatively small amounts in the Treasury's Debt Management Account Deposit Facility, which carries the highest AAA rating but has a below-market rate of return. In June, July and August, they deposited £1 million each month in the Treasury account but this rose tenfold in the first 24 days of October, the Local Government Chronicle reports.

Councils claim that they consulted independent financial advisers and credit rating agencies before they invested in Icelandic banks as late as September this year. But some did decide to pull their money out after warnings earlier in the year.

The figures show the first evidence that councils are withdrawing their cash from the banking system after ministers refused to guarantee their Icelandic deposits as they did for individual savers. Government guidance states that councils are required to give priority to the security and liquidity of the investments before considering the potential yield they might return.

Westminster City Council, Kensington and Chelsea and Oxfordshire City Council have all revealed that they are reviewing their investment strategy. David Shakespeare, the vice-chairman of the Local Government Association (LGA), said: “All authorities that have been burnt in the Icelandic crisis will be repackaging their investments, looking for maximum security. I am not surprised there is a lot of movement going on now.”

Some councils are investing only in the eight UK banks with government guarantees, gilts or Irish banks, while others are considering pooling investments to ensure a better rate of return from deposit accounts.

In a further blow, a snap poll by the LGA found that more than half of all councils are reporting that businesses in their area are struggling to meet their regular business rate payments. Local councils collect business rates, which are then sent to central government and redistributed among local authorities.

Charity chiefs met Kevin Brennan, the Minister for the Third Sector and Treasury officials on Wednesday to try to sort out when, or if, they would get their money back. Charities, which have more than £125 million in Icelandic banks, are likely to be seen as the top priority for the first tranche of money returned and many are hoping that they will be eligible for compensation under the Treasury's Financial Services Compensation Scheme.

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