Councils across the West which invested taxpayers' money in collapsed Icelandic banks may be allowed to mortgage their town halls to get themselves out of a financial hole.

The news came as councils pleaded their innocence yesterday amid claims they were warned against Icelandic investments as long as two years ago.

The Western Daily Press told last week how more than £110 million is at risk, as some 14 local authorities from the region put cash into the banks.

Now the Government is considering a request from the Local Government Association (LGA) to relax the rules, to make it easier for councils to take out loans secured against their assets for their day-to-day needs.

The move came after it emerged more than 100 councils and police authorities across the nation had deposited around £800m in Icelandic banks.

The Icelandic government has taken over three of the banks, while Britain has controversially used anti- terror laws to freeze their assets here, to try to protect savers and public bodies.

Charities and at least two major hospitals have also been hit, after being tempted by the high rates of interest offered in Iceland.

Councils are waiting to find out how much of their cash, if any, they are likely to recover, or whether the Government will help bail them out.

However, ministers have been cool on the idea, pointing out local authorities have access to expert advice, in contrast to individual savers, whose money has been guaranteed.

Chancellor Alistair Darling said yesterday: "Discussions are taking place between local government and ourselves and those discussions will continue."

The LGA said it was not clear how many councils might want to use town halls as collateral.

A spokeswoman said: "All councils have enormous capitalisation assets and town halls, in prime property locations, worth millions.

"If there are some councils that, in the short term, have cash flow problems we would like the very strict rules to be relaxed so town halls can be used as collateral."

She was "optimistic" the Government would respond positively to the request – and would consider a separate request for councils to be permitted to delay their payment of business rates.

Meanwhile, Mr Darling announced Landsbanki has been loaned £100m by the Bank of England to keep it operating.

The loan, secured against the bank's assets frozen by the British Government, is necessary because it has no working capital, he told MPs.

The Chancellor said an "accelerated payout" had been agreed in principle for individual savers, and work continues to "facilitate claims by UK charities and local authorities". More than £100m of the region's taxpayers' money hangs in the balance.

The Local Government Association claims its members are innocent victims of the collapse but expert advisers Arlingclose said the danger signs had been present for some time and staff had warned many councils against investing.

The company had advised its 45 council clients to steer clear but company director Mark Horsfield said he knew "for a fact" at least a third of the councils facing the heaviest losses had received his company's warning.

Dorset and Somerset county councils had made the biggest investments in the region and are set to lose £28.1m and £25m respectively.

Several councils in the West decided against investing in the Icelandic banks including Bath and North East Somerset and Herefordshire County Council. Another, Taunton Deane Borough Council, said it had heeded the warnings and had remained unaffected by the collapse as a result.

Somerset County Council said investments were made based on a range of criteria and the banks had held good credit ratings.

A spokesperson for Dorset County Council said: "We hadn't received any warning from the Treasury, or any warning at all about pulling out our investments in these banks."