The leaders of councils that could lose up to £12 million in the Icelandic bank crash have denied claims they are poised to put millions more taxpayers' money at risk.

Opposition councillors have called for a major review after finance chiefs in Gloucestershire agreed to increase the amount invested in "money market funds".

Finance chiefs claim they are safe but the Liberal Democrats say this is because they are relying on assessments by the same credit reference agencies that gave the Icelandic banks the 'all clear'.

And they say there is mounting concern about the security of such funds, once considered the next best thing to cash, because they are required by law to invest in low-risk securities such as government bonds.

Gloucestershire County Council was among a group of 14 West councils and one police authority which invested £117.3 million into the Icelandic banks after the crash.

Finance chiefs have told council leaders that well over two-thirds of the council's money is invested in British banks and building societies and they will be able to absorb the £12 million loss without any major cutbacks in front line services.

But they recommend that when considering investing some of the £165 million budget, they should not use long- term accounts but put up to £30 million at a time into the "money market funds", of which they already hold two worth £30 million.

Liberal Democrats accuse the council leaders of basing the decision on the fact that the funds are rated highly by the same American credit reference firms which awarded the Icelandic banks the top triple A score for security and say questions are already being asked about how safe they actually are.

They point out that this week, an American congressional committee probing the role of credit reference agencies in the current crisis, heard allegations that conflicts of interest stopped them giving impartial advice on the safety of mortgage-backed securities.

Two of the three companies being questioned by the committee are Moody and Fitch, which are both used by British organisations such as Gloucestershire County Council to help assess the safety of their investments.

Liberal Democrat leader, Jeremy Hilton, accused the Conservative leadership of "nodding through" an investment strategy that made "grim reading for taxpayers in Gloucestershire" and called for a complete review.

She said: "Gloucestershire made the same mistake as many other councils with the Icelandic banks and people in the county are already at risk of losing £12 million.

"Now the council's cabinet has launched head-first into making new investments of up to £30 million of taxpayers' money. We believe the council must take immediate action to prevent more money being put at risk."

But Tory leaders denied putting more money at risk.

"The Liberal Democrat's claims are utterly untrue," said Councillor Ray Theodolou, lead cabinet member for resources.