Public trust in councils' financial abilities has not been eroded by the Iceland banking crisis, according to the LGA.

Following confirmation that 123 authorities had deposited £919.6m in Icelandic banks and their UK licensed subsidiaries, council leaders released survey results showing 59% of people agreed it was reasonable for councils to try to earn interest on the public funds they managed.

It also found 57% of people agreed that councils were caught up in unprecedented global financial problems beyond their control.

Cllr Margaret Eaton, chairman of the Local Government Association, said: ‘This poll demonstrates that a majority of people understand that local authorities make investments to earn interest, which keeps council tax down and is used to invest in frontline services.'

Her meeting with the Icelandic ambassador was less fruitful and, although described as ‘cordial', resulted in a standard diplomatic communiqué agreed by both sides. ‘The ambassador will make our representations known to the Icelandic Government,' an LGA spokesman said.

Ms Eaton will tell social services chiefs this week she is ‘completely absorbed' in work to get the money back.

She will say: ‘Let's be clear – the money that is currently at risk isn't just "nice to have", and it's not as if the loss of it would have no future consequences for councils or for communities.'