Treasury Ministers Stephen Timms and Ian Pearson and Local Government Minister John Healy held talks with the Local Government Association.
In a joint statement afterwards they said: "Government and the LGA agreed that there is no evidence of recklessness by local authorities."
They added: "We will judge what's appropriate on a case-by-case basis but in previous situations support has included helping local authorities restructure their financial priorities, providing additional expertise and capitalisation of expenditure."
The government has frozen the assets held in the UK by the Icelandic bank Landsbanki.
BBC local government correspondent John Andrew said there was growing anger among local authorities, which said they had followed Treasury advice by investing surplus money in a way that would deliver the highest return for taxpayers.
He said the councils had been told by the government that the Icelandic banks had been given a "double A" rating.
According to figures acquired so far for local authorities, Kent County Council has the largest deposit, worth Â£50m.
Nottingham City Council has invested Â£42m, while Transport for London has Â£40m deposited in one of the affected banks.
The next biggest known investments are Norfolk County Council's Â£32.5m, Â£30m by the Metropolitan Police, Dorset County Council's Â£28.1m and Hertfordshire County Council's Â£28m.
The Conservatives have warned that town halls could face a "massive financial shock" and be forced into council tax hikes or cuts in local services.
"They are not going to find it easy in the short term," shadow communities secretary Eric Pickles said.
He added: "We need to look at the number of authorities that will be facing a cash-flow problem - some have their payroll on this, for others it's in terms of long-term investment."
The Lib Dems said the money at stake was "essential" for delivering local services and urged ministers to "make clear" how such funding would be protected.
Local government minister John Healey: 'This isn't money that's lost'
The LGA insisted all the councils involved had enough money to ensure frontline services should not be affected.
But it wants the same protection for councils as has been given to personal customers of IceSave and other failed Icelandic banks.
The prime minister said: "We are freezing the assets of Icelandic companies in the United Kingdom where we can.
"We will take further action against the Icelandic authorities wherever that is necessary to recover the money. At the moment we are talking with the local authorities... to see what we can do to help."
Icelandic Prime Minister Geir Haarde said his government was working to repair relations with Britain amid the crisis.
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