Norfolk councils vying to get back nearly �50m tied up in Icelandic banks have hit a snag after one bank refused to give local authorities preferential status ahead of other creditors.

Norfolk councils vying to get back nearly �50m tied up in Icelandic banks have hit a snag after one bank refused to give local authorities preferential status ahead of other creditors.

The collapse of Iceland's banks last year left millions of people out of pocket including dozens of councils, who had invested large chunks of their cash in the country.

Norfolk County Council has �32m invested in three banks while Breckland has �12m tied up and Great Yarmouth has �2m invested.

But the county council and Breckland have hit a snag getting all their cash back after one bank, Glitnir, said it would treat councils as general unsecured creditors, in contrast to other banks which have agreed to give them priority status.

That means councils could only get around 30pc of their cash invested in the bank back and has sparked a legal challenge from the Local Government Association (LGA).

County Hall, which has �7.5m invested in Glitnir, said its forecasts for how much it could recover have fallen from �29.3m to �23.6m, while Breckland which has �2m invested in the bank, was still waiting to learn how much it will recover - though it had already received �1.25m from another bank Landesbanki.

Yarmouth is not affected as it holds no funds in Glitnir.

Ian Mackie, the county council's cabinet member for finance and performance, said the authority would now look to the LGA legal challenge to see if it can recover the funds.

“We have always known that successfully recovering funds from the three Icelandic banks was going to be a drawn out process, with twists and turns likely along the way,” he said. “While we now know we are set to recover more funds from Kaupthing than first thought, the decision by Glitnir not to recognise local authorities as priority creditors is very disappointing, and seems to my mind, wrong and illogical.

“It's not only at odds with the stance being taken by other Icelandic banks, but it's inconsistent with the information published previously by the bank itself.”

Meanwhile in a separate move a deal for Iceland to repay up to �2.3bn lost by savers in Britain when the country's banking system collapsed was thrown into doubt yesterday when its president, Olafur Ragnar Grimsson, refused to sign it off, and said the decision could now be put to a referendum.

The UK Government pledged that no-one would lose money through the failure of the group, and said it would step in to cover any money lost above the sums covered by deposit guarantee schemes.