DORSET County Council has revealed it has more than £28 million deposited troubled Icelandic banks.

The council placed the funds with Landsbanki and Heritable several months ago when Icelandic banks offered some of the highest interest rates on the market.

Now, with Iceland’s banks struggling with massive foreign debts totalling 61 billion US dollars and investors rushing to withdraw their savings, the money is at risk.

The Icelandic government has taken over the country’s entire banking sector but has refused to guarantee British deposits, to the dismay of the county council.

Chancellor Alistair Darling has moved to freeze £4 billion of UK domestic assets with Icelandic banks using anti-terrorism powers, but has so far resisted pressure from local authorities to offer the same protection to their deposits.

He also angered councils by suggesting they were at fault for not taking sounder financial advice.

But county council leader Cllr Angus Campbell insists the government is to blame.

He said: “The council has followed government guidelines and deposited its cash balances with a wide range of banks to ensure that any risk is minimised. “We will continue to press the government to protect our investment and take every possible step to recover this money.”

The council manages its own cash balances and is responsible for the Dorset county pension fund, which in total amount to £225 million.

The fund provides pensions for over 40,000 public sector employees in Dorset.