The Assembly Government cannot tell local councils where to put their money, First Minister Rhodri Morgan said today.

He said the opposition could not blame his administration for the fact that authorities had money stuck in frozen Icelandic accounts.

County halls were issued guidance on how to invest, but it was up to them to take financial advice and decide where to deposit their money, Mr Morgan said.

During question time in the Senedd, he repeated an offer of help to councils with debilitating cash-flow problems as a result of the crisis.

But he warned they could not expect to be bailed out by the Assembly Government if they lose their money.

Public bodies in Wales - including councils, universities and police authorities - have a combined £78 million exposed to the Icelandic banking collapse.

Labour AM Huw Lewis asked the First Minister if he would encourage councils to invest with ethical banks or credit unions after the fall-out from the financial turmoil.

Mr Morgan said: "In the end it's not for us to tell local authorities where to bank or how to handle these treasury functions because they hire investment banks or pension fund advisers who advise them how to spread the load and spread the risk.

"On this occasion, clearly, people got it wrong.’’ Compensation for "ordinary punters’’ caught up in the banking collapse was fair, but not for councils who get professional financial advice.

"We have said that compensation is not appropriate for wholesale investors,’’ he said.

Tory leader Nick Bourne said: "The First Minister, when he says that local authorities are free to act and that it's a matter for them, they can only act within the guidelines that you issue.’’ The Assembly Government could not "wriggle out’’ of its legal liability, Mr Bourne said.

"The buck will ultimately settle, I think, with the Welsh Assembly Government in terms of the guidelines you issue.’’ Welsh Liberal Democrat leader Mike German asked Mr Morgan if he supported the policy of US presidential candidate Barack Obama - who the First Minister described as a "symbol of hope for many people’’ - of tax cuts for middle and low-earners.

Mr German said: "Will you be able to actually go back, review your budget and come back with more support for those council tax payers in Wales?’’ The Assembly Government was trying to increase take-up of council tax benefit among people who qualify, Mr Morgan said in reply.