Several London councils are desperately seeking reassurances from central government today as tens of millions of pounds may have been lost in the Icelandic banking crisis.

Local authorities across the city, even Transport for London, have invested taxpayers’ money in failing or defunct banks and their British subsidiaries. They are now pleading with the Treasury to expand the protection promised to personal savers.

The Conservatives called it a 'massive financial shock' and have warned up to £1 billion in local funding may be lost - with council tax bills rising to cover the potential fallout.

Tories claim they know of a London borough which has a £40 million exposure with three others with deposits ranging from £20-25 million.

Barnet, Brent, Westminster, Havering, Hillingdon and Sutton

Barnet council is thought to have £20 million tied up in Icelandic accounts, Hillingdon has £20 million, Brent may lose £15 million, and Westminster confirmed it had £17 million deposited in Landsbanki and Heritable.

In an indication of the seriousness of the situation, the government has seized control of the UK arm of Iceland's Kaupthing bank on the belief it could not honour its obligations to customers.

The Icelandic government has said it can not guarantee British savings as it battles to save its own skin in the rapidly sinking island economy.

Havering has confirmed it has £12.5 million "frozen." However, speaking to the Times Council leader Michael White said:

"...there is no indication at this time that our deposits will not be returned."

Sutton may lose £5.5 million in the fall out.

Losses could be £200m

The umbrella group for London boroughs, London Councils, said up to £200m could be in Icelandic banks.

The Taxpayers' Alliance has weighed in and labelled the investments an absolute disgrace, accusing councils of making poor financial decisions.

Speaking to the BBC, London Councils' chairman Merrick Cockell said "nobody could have anticipated the collapse of what were once safe deposits."

Transport for London

Transport for London is also caught up in the financial chaos, confirming it has £40 million with Kaupthing Singer & Friedlander. A spokeswoman said:

"We are urgently seeking further information on the situation."

The Treasury is said to be weighing up the risk after yesterdays unprecedented £500 billion banking bailout.