Council tax bills could increase, with spending on services slashed, after millions of pounds of Oxfordshire taxpayers' money was caught up in the Icelandic banking crisis.

Today, it emerged the county's six main councils had a combined £28.5m invested in three Icelandic banks — and there was no guarantee the money would be repaid.

And Thames Valley Police Authority has £5m deposited with the Icelandic bank Landsbanki.

The Local Government Association was tonight lobbying the Government to bail out councils whose finances had been affected and Oxford East MP Andrew Smith urged Chancellor Alistair Darling to intervene.

Oxford City Council has £3m deposited with Heritable Bank and £1.5m with Glitnir Bank.

Deputy leader Ed Turner said: "I'm very worried by this — this is a bolt from the blue, wrecking our best-laid plans.

"It would be quite wrong for us to be hung out to dry by the Icelandic government, or for that matter the British Government, because we have taken due care and attention over this."

Mr Turner said he could not rule out a rise in council tax, to raise extra revenue. But he said a cut in spending on services was the most likely option, because the Government would step in to prevent a big tax increase.

He said: "It's far too early to say which spending plans could be affected, but we could have less money and that leaves us with an unpalatable series of options.

"The council is already under pressure, because paying for the concessionary fares scheme has put us about £400,000 over budget and we were left with £4m of unallocated savings by the Liberal Democrat administration."

County Hall has £5m deposited with Landsbanki and Charles Shouler, the council's cabinet member for finance, said the authority had "caught a small cold" in the Icelandic banking crisis.

He said: "We can absorb this by dipping into our reserves and this will not impact on services or the council tax in the case of the county council, but I cannot speak for the district councils."

West Oxfordshire District Council has £9m in Icelandic banks; Cherwell District Council £6.5m; South Oxfordshire District Council £2.5m; and the Vale of White Horse District Council £1m.

Mr Smith said: "I have immediately contacted Alistair Darling to press the particular needs of people and councils here in Oxfordshire.

"It would be quite wrong if local council tax payers or services were to suffer as a result of the refusal of the Icelandic government to stand fully behind its banks.

"I will speak to Alistair Darling personally on this."

Barry Norton, the leader of West Oxfordshire District Council, said: "As far as the everyday running of the council is concerned, it's business as usual. This is damned annoying — and if we have to take it on the chin, we will."

A joint statement from the Vale and South Oxfordshire district councils said: "The Vale had £1m invested in Landsbanki, while South Oxfordshire had £2.5m invested in Kaupthing.

"These investments are considered to be safe, so the councils are in no immediate difficulty."

James Macnamara, executive member for resources at Cherwell District Council, said: "We will do our best to ensure the uncertainty over the return of the investment doesn't adversely affect the services we provide to our residents."