LOCAL authorities across the UK were yesterday stunned to discover that Iceland is nothing more than a volcano surrounded by two million haddock.

As the volcano's banks refused to pay out, councils said they were convinced Iceland was a small, landlocked country next to Belgium with a long history of expert financial management.

But after 15 minutes on the internet they confirmed it was nothing more than a slab of stinking lava populated by a handful of wilfully eccentric musicians and half a dozen heavily bearded trawler captains.

Julian Cook, director of finance at the Local Government Association, said: "I meant Luxembourg – shit!

"I suppose the haddock-shaped piece of lava with every new account was probably a clue."

Mr Cook is now demanding £1bn of taxpayers' money in compensation for losing £1bn of taxpayers' money.

He added: "When the taxpayer is exposed in this way it is only right that central government should step in with its own funds, wherever they come from."

But the Treasury has so far refused, criticising the councils for investing huge amounts of public money in badly run banks.