Nine of the region's public service bodies – including councils, transport and police authorities – have a total of £54.82m deposited with a series of collapsed Icelandic banks.

The total amount invested by British local authorities in Iceland is estimated to stand at £750m.

Mr Brown, speaking last night in Birmingham, said: "This is a problem that has been caused by Iceland. It is totally unacceptable behaviour. I have talked to the prime minister of Iceland.

"We are taking legal action against money that has been moved out of Britain into Iceland. We are trying to freeze the assets of Icelandic companies here.

"It is a responsibility of the Icelandic government, but we recognise also that there are issues for local authorities and we are talking to local authorities today to see what we can do to help them."

"Last night the Government said it would help the "small number" of authorities suffering "severe short-term difficulties" but would not promise the same full refunds that it has for individual depositors. Each will be helped on a case-by-case basis.

The move came as the Prime Minister said bankers and financiers who took irresponsible risks should be "punished" for their actions.

Mr Brown said: "I am angry at irresponsible behaviour. Our economy is built around people who work hard, who show effort, who take responsible decisions, and whether there is excessive and irresponsible risk-taking, that has got to be punished."

The Treasury said it had put in place arrangements to ensure that all individual depositors in the Icelandic banks of Landsbanki – including its Icesave products – Heritable, and Kaupthing Singer and Friedlander – including its Edge products – would receive their money in full.

Despite no such assurance for "wholesale" depositors, including local authorities, councils in Yorkshire last night moved to reassure residents that services would not immediately be affected.

Wakefield Council, which has £9m in Iceland, said it would now only place short-term investments and only in British and Irish banks.

Doncaster mayor Martin Winter, whose authority has £3m in Icelandic banks, said his authority "has been caught up in a very unusual set of worldwide circumstances" while Rotherham, which could lose up to £3.75m, said it would "encourage the Chancellor" to offer councils full protection.

Humberside Police Authority, which has £5.57m tied up, said there would be no immediate impact on front-line policing but that it was a matter of "serious concern".

North East Lincolnshire Council has £7m in Icelandic banks. It said a delay in repayment was manageable without affecting services. North Lincolnshire, which has £5.5m invested, said it could continue to pay its bills.

Others with money tied up are the West Yorkshire Police Authority (£6m), South Yorkshire Passenger Transport Executive (£6m), Kirklees Council (£1m) and Bassetlaw Council (£8).