The amount of local authority cash at risk after being deposited in Icelandic banks has now risen to over £550m.
Council leaders are seeking an urgent meeting with the chancellor and are arguing the funds - from more than 70 authorities - must be guaranteed.
The Treasury has said councils must be treated "fairly" but ministers have so far declined to guarantee the money.
The Local Government Association insisted frontline council services were not at risk despite the crisis.
The Conservatives said that the total amount of money deposited in Icelandic banks could reach £1bn once all authorities' losses were clear. The Lib Dems said a third of councils may be affected.
Colin Barrow, leader of Westminster City Council, said the situation was "unfortunate" but insisted services would not be compromised.
"It is a very serious matter but it is not going to affect the way council services are being delivered," he told the BBC.
Council investments
The Treasury, which has given no guarantees over the money, said it wanted to "establish the facts" about councils' financial exposure and was prepared to have discussions with them about a "way forward".
Councils identified by the LGA, which represents authorities in England and Wales, include Kent County Council, which has £50m invested with Iceland-based banks.
The LGA is still trying to work out the total sums involved but deputy chief executive John Ransford disputed the Conservative claims of the amount of money at risk.
But he said that "significant" amounts of public money were at stake which must be protected.
"This is public money and we need to treat this in exactly the same way as individual investors in these banks," he told the BBC.
Westminster City Council has revealed it has deposits totalling £17m while Sutton and Havering Councils in London have investments worth £5.5m and £12.5m respectively.
North Lincolnshire Council has £2m deposited with Landsbanki and £3.5m in Heritable. North East Lincolnshire Council said it had £2.5m in deposits with Landsbanki.
Hertfordshire County Council has £17m invested, while Buckinghamshire has £5m, as has Cornwall County Council.
Mayor of London Boris Johnson has also revealed that Transport for London had £40m deposited in one of the affected banks.
"We are looking to see what redress we can find," he said.
'Massive shock'
The Conservatives have warned that town halls could face a "massive financial shock" and be forced into council tax hikes or cuts in local services.
"They are not going to find it easy in the short term," Eric Pickles, the shadow communities secretary, said.
He added: "We need to look at the number of authorities that will be facing a cash-flow problem - some have their payroll on this, for others it's in terms of long-term investment."
The Lib Dems said the money at stake was "essential" for delivering local services and urged ministers to "make clear" how such funding would be protected.
The LGA insisted all the councils involved had enough money to ensure that frontline services should not be affected.
But it wants the same protection for councils as has been given to personal customers of IceSave and other failed Icelandic banks.
Nick Chard, cabinet member for finance on Kent County Council, said the local authority would "fight to get every single penny back".
He defended the local authority's decision to invest in Icelandic banks despite concerns about their indebtedness, saying its investments were made on the basis on sound professional advice.
"We have followed the protocols exactly to the letter," he told the BBC, adding that it had spread its investments as widely as possible.
Anger
The BBC's local government correspondent John Andrew said there was growing anger among councils, which say they had followed Treasury advice by investing surplus money in a way that would deliver the highest return for taxpayers.
He said the councils had been told by the government that the Icelandic banks had been given a "double A" rating.
Gordon Brown has said legal action will be taken over Iceland's failure to guarantee compensation for UK customers in its banks.
Icelandic Prime Minister Geir Haarde said his government was working to repair relations with Britain amid the crisis.
