The Audit Commission has accused Kent County Council of negligence over its investments in Icelandic banks.

It says the authority failed to spot warning signs about the possible risks.

The damning verdict comes in a report published today investigating how councils came to invest hundreds of millions of pounds of taxpayers' money in Iceland.

KCC has £50million tied up in three banks. It has now emerged it invested a further £5million in Iceland days after being warned against doing so. The £5million is in addition to the £3million deposited after finance officials failed to open an e-mail warning them against it.

It is understood the authority did so because it was contracted to, although it is unclear whether it considered breaking the agreement, something that could have led to a financial penalty.

The independent watchdog singles out the county council as one of seven negligent for failing to recognise the risks of putting money into Iceland - at a time when other authorities were withdrawing their cash or stopping investments.

It said KCC and others relied too much on advice from professional consultants and failed to take account of other information available that was highlighting the deteriorating situation in Iceland.

But council chiefs have hit back, pointing out the Audit Commission itself has money at risk in Iceland, and claiming it also failed to spot the warning signs.

Audio: Cllr Nick Chard, cabinet member for finance, talks to KM Group's political editor Paul Francis about the report's findings

In a 68-page report, the Audit Commission says KCC breached strict accountancy rules and its own treasury management policies.

It highlights the failure by finance chiefs to open an email from its own brokers warning against depositing money in one particular bank.

As a result, £3.3million was deposited with the Heritable bank just one day later, a mistake KCC has publicly acknowledged.

The Audit Commission criticises KCC and six other councils for not being as wary as they should have been.

"The common denominator for those [councils] that were less cautious was an over-reliance on credit ratings agencies and external advisers, to the exclusion of other information," it states.

Chief executive of the Audit Commission Steve Bundred said: "We found most local authorities heeded the warning signs about Icelandic banks - but some did not and a number were negligent."

The report has angered County Hall Conservative chiefs. Cllr Nick Chard, cabinet member for finance, accused the Commission of creating a "smokescreen" to cover its own mistakes.

He said: "It really is a case of the pot calling the kettle black. We have been very open and transparent and have admitted a human error meant £3.3million was deposited in Heritable on 1 October.

"The Audit Commission's own internal report stated they were not aware of the potential problems with Icelandic banks until Monday 6 October 2008; yet they are highly critical of local authorities making deposits after April 2008.

"I find this a convenient smokescreen for the Audit Commission, which has twice the level of exposure in Icelandic banks that KCC has."

But Liberal Democrat leader Cllr Trudy Dean said the Audit Commission was right.

She also claimed that six months after the crisis KCC had yet to make any significant changes to the way councillors were kept informed about investments.

She said: "There is clear evidence that, nationally, there were enough indicators for people used to dealing in the financial world to pick up some concerns about Iceland and to begin to ask questions.

"There are enough reasons for us to say 'something went seriously wrong here'," she said.

She added: "There has been no acceptance of any fault anywhere within the county council and in its statements, the council has tried to dismiss this as money that almost does not matter."

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Other Kent councils who invested money in Iceland avoid being criticised in the report.

They are Canterbury City Council (£6million); Sevenoaks council; Tonbridge and Malling and Dover District Council (£1million).

Kent Police Authority has £10million invested.