Council leaders are to hold talks with the Icelandic ambassador to seek assurances their investments with the country's failed banks will be repaid.
About 100 councils in England, Scotland and Wales have deposits worth Ј842.5m.
There are fears some council workers may not be paid because payroll money is tied up in the collapsed banks.
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Council reserves
The BBC's local government correspondent John Andrew said that, while most of the money invested is longer term, some councils deposit payroll money to earn interest.
Since Iceland was forced to nationalise its main banks, which fell victim to the global financial crisis, that money is currently out of reach.
"The councils affected want the government to tide them over by allowing them to keep the revenue from business rates, which they normally pass onto government first," said our correspondent.
Unions are watching with concern and want to know how many workers could be affected.
The Local Government Association (LGA) said all councils hold reserves and in the majority of cases there would be no impact on staff pay or services.
The government has ruled out any large scale bail-out of councils, instead promising assistance to those facing severe short-term difficulties.
Taxpayers' cash
The LGA, which represents councils in England and Wales, said the meeting with the Icelandic ambassador would take place next week.
It wants taxpayers' money to be a top priority when repayments are made and says if it fails to win assurances from the ambassador, it will take its case directly to the Icelandic government.
The LGA said some 108 local authorities had deposited money in the Icelandic banks but it insisted they had not been "reckless" with taxpayers' cash.
However the Icelandic government has not extended the same degree of protection to councils that it has been guaranteed to individual UK savers.
The LGA is also expected to hold more talks with the British government next week.
In addition to local councils, other UK public bodies, companies and charities had deposits with the failed banks.
All UK private accounts affected by the crisis will be protected.
A Treasury delegation, which includes officials from the Bank of England and the Financial Services Authority, is in Reykjavik trying to establish a claims procedure for British depositors to get their money back as soon as possible.
The talks are expected to last all weekend and the early signs are that significant progress has been made.
(BBC)
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