Bristol City Council and North Somerset Council could lose millions of council taxpayers' money deposited in a stricken Icelandic bank.

The money is invested with Landsbanki, Iceland's second largest bank, which has been nationalised amid an escalating financial crisis.

Yesterday, the country's government announced that only domestic investments would be fully guaranteed.

Since then, it has emerged that 20 local authorities in the UK have made multi-million-pound deposits in Iceland.

It was not clear last night whether the British Government, which has promised to cover personal deposits from UK investors in the struggling Icelandic banks, would also bail out the council's money.

If the Government does not step in, Bristol City Council, which has £8 million invested in the bank, and North Somerset, which invested about £3 million, may not be able to go ahead with major projects.

Bristol City Council said in a statement: "These loans were made in accordance with the council’s treasury management policy and procedures, which are prepared and reviewed with independent professional advisers and approved by the council’s external auditors.

"There is no immediate threat to the council’s financial operations and it is too early to say what the longer term effect will be.

"Like many other councils and large public sector organisations, the city council lends temporary cash balances to earn interest and to maximise returns for the tax payers of the city."

North Somerset Council's executive member for finance, Tony Lake, said: "The money is part of a portfolio of investments that we have spread among a number of banks so that any potential risk is also spread.

"At the moment, there is protection only for individual investors and we wholeheartedly support efforts made to seek some sort of protection provided by the Government to prevent any loss of council taxpayers' money.

"We are monitoring the situation closely, but if significant losses were made, then it would impact on our ability to deliver capital projects.

"As yet, this is the only way we have been affected by the credit crunch, although the reduction in interest rates doesn't help us either."

No one from Bristol City Council could confirm last night whether the authority had placed any money with Landsbanki or its subsidiaries.

South Gloucestershire and Bath & North East Somerset councils said they did not have deposits with the bank.

Council bosses around the country have called on Chancellor Alistair Darling to extend the protection he has offered private investors to them as well.

One authority – Kent County Council – has £50m deposited in troubled Landsbanki and its UK subsidiary Heritable, as well as Glitnir Bank, while Westminster City Council confirmed it had £17 million tied up in Icelandic accounts.

Local Government Association chairman Margaret Eaton has written to Mr Darling seeking an assurance that the assets will be protected.

She said: "In the short term, these councils are confident that they will have sufficient funds to tide them over for a considerable period of time.

"Councils' experience of ensuring stability in a financial crisis will mean that they will keep vital frontline services running through thick and thin and this situation is no different."

Yesterday, the Chancellor insisted councils were not in the same situation as individual savers.

He told MPs: "I do know the position about local authorities. They're in a slightly different position in that they are more of an informed investor.

"But this situation is evolving. We are trying to sort the matter out with the Icelandic government."