Councils that invested money in Iceland have been told the debts of one of banks involved are three times what it is now worth.

Kent County Council has £50million tied up with three Icelandic banks while Canterbury City Council has £6million and Sevenoaks, Tonbridge and Malling and Dover have £1million each. Kent Police also has £10million locked into the banks.

Administrators of Landsbanki, one of the three banks, have indicated that its liabilities, of which 40 per cent are deposits, are nearly three times the value of its remaining assets.

Of the £50million invested by KCC, some £17million is with Landsbanki.

In a briefing letter sent to council chiefs, the Local Government Association says it remains unclear whether councils will be entitled to greater priority than other investors when it comes to getting their money back.

The note states that if councils are viewed as "preferential creditors", the prospects of getting their money back would be enhanced.

But it warns: "The issue is legally complex and further legislation is due to be passed in Iceland which may have a bearing on this."

There is more optimistic news about a second bank, Heritable, which is UK-based.

Administrators believe that investors are likely to get their money back and may also be entitled so some dividend. A decision on that is expected next month.

Meanwhile, in a sign the process of getting any money back could be prolonged, the Government has moved to allow councils to postpone the impact of any potential losses on services and council tax levels until 2010.

Local government minister John Healey said: "This money isn’t lost, but it is at risk, so under normal financial rules this risk would need to be taken into account in their budgets.

"I was concerned about the possible, and potentially unnecessary, effect this could have on services and council tax.

"That’s why I am taking this exceptional step that gives authorities some breathing space that should allow them to be clearer what sums, if any, are still at risk."