The Local Government Association (LGA) claims that around 40 councils had savings deposits with Landsbanki - with authorities in London alone believed to have about £200M invested.
TfL meanwhile confirmed it had £40M invested with Icelandic bank Kaupthing Singer & Friedlander and was now working with the LGA to lobby the Treasury.
The LGA today asked Chancellor Alistair Darling to protect local authority deposits as he has done with individual UK savers.
"We are today seeking an assurance from the Chancellor that councils’ assets will be protected in the same way as personal assets,"said LGA chairman Margaret Eaton.
"Town halls invested in Landsbanki as a reputable bank with a solid credit rating. In the short term, these councils are confident that they will have sufficient funds to tide them over for a considerable period of time.
"While this may affect some councils financially, we do not expect it to have any impact on local services."
The London boroughs affected include Westminster, which had £17M split between Landsbanki and Heritable; Sutton — £5.5M; and Havering, which has investments totaling £12.5 M.
Outside the capital, Kent County Council said that it had £50M deposited in Icelandic banks — £15M with Glitnir Bank, £17M with Landsbanki and just over £18M in its British subsidiary, Heritable.