By Dan Lalor

LONDON (Reuters) - Local authorities with deposits in failed Icelandic banks, will be protected by rules preventing them from investing a high proportion of their cash with any one institution, but may have to draw on contingency funds.

The Local Government Association, which has asked the government to give councils the same guarantee extended to retail savers, is due to meet Treasury officials on Thursday.

But it said it was confident councils have enough money in contingency funds for front-line services to remain unaffected.

A host of local authorities echoed this view.

Transport for London, which has 40 million pounds in Kaupthing (KAUP.IC: Quote, Profile, Research), the latest Icelandic casualty, said that the amount "is a significant figure, but needs to be set in context against TfL's total annual budget of 7 billion pounds".

"Clearly we need to see what we can do to resolve this situation but it's not going to have an impact on day-to-day services," said a spokesman for TfL, which runs the capitals' buses and underground trains, and is, by law, a local authority.

Kent County Council, whose 50 million pounds investment with three Icelandic banks is among the largest announced so far, said: "It's a large amount of money but (the council) has a gross revenue budget of 2.2 billion pounds and a capital budget of 400 million pounds. So, proportionately it's not that large."

NO GUARANTEE  Continued...