The council released an official statement this morning in a bid to allay fears that millions of uninsured taxpayers' cash could be lost.

The district council is one of more than 20 councils in the UK that has large sums of money invested in the Icelandic bank Landbanksi or its UK branch Heritable.

At this stage the council is unclear to the extent of potential losses and says it will become clearer as the situation unwinds.

West Lindsey's chief executive Duncan Sharkey said investments made by councils up and down the country are at risk even though they were made in line with best advice.

"The situation is far from clear at present," he said.

"Governments, liquidators and compensators are all working on the problem and the Local Government Association (LGA) is pressing the national Government to protect local authorities and council tax payers' money in the same way they have safeguarded private investments."

"The LGA is calling on the Government to extend to local authorities, who have prudently managed council tax payers' money, the same assurances that money that has been invested in accordance with the law, and the Government's own guidance, will be fully protected. The Chancellor is being asked to protect councils' assets in the same way as personal assets. Town halls have invested in reputable banks with solid credit ratings."

Neighbouring authority North Lincolnshire Council have confirmed today it has £5.5 million in the banks and Bassetlaw Council also has money wrapped up in the troubled overseas accounts.

"All of our deposits are secured on bank assets and all of the banks we are with have significant assets. Unfortunately, as the Icelandic economy has deteriorated these fixed term investments became vulnerable," said Mr Sharkey.

A key issue for the council is cash flow as several of the deposits were scheduled to return this week and next week. However, with the help of the authority's bank and supportive partners, it is working to overcome the problem.

Mr Sharkey added: "The message to our customers is that it is still very much business as usual. Food safety inspections, housing advice and all our other many and varied services will still be delivered as we work to resolve the financial issues that the Icelandic collapse has thrown up."

Gainsborough North Ward member Coun Tom Brown said these were uncertain times for the authority.

"If it was me, alarm bells should have started ringing when we heard about the trouble when the American banks started to collapse," he said.

"The council has a substantial amount of money in these banks from the sale of the council houses to housing company Acis around 2001."

"Lets hope the Government will step in to help out the authority or they could have lost a substantial amount of interest on their own capital funds," he added.

Click here to see what district and county councillor Pat O'Connor has to say on threats to the Gainsbrough town-centre regeneration plans