Pressure was mounting today for an in-depth investigation into the activities of the big three credit rating agencies, which stand accused of missing banking problems ranging from Iceland to the US subprime mortgage crisis.

Local authorities, which are believed to have more than £1 billion of council taxpayers' money locked in the three nationalised Icelandic banks, blame the agencies for assigning rock-solid ratings to the country's institutions only changing their opinion "a few weeks" before the crisis hit.

The powerful Treasury Select Committee found this year that the subprime crisis in America and its knock-on effects had exposed the way the agencies conducted their business, notably that they were paid by the very organisations they were rating.

The report said: "The problems affecting financial markets since early August 2007 have highlighted inherent and multiple conflicts of interest in the credit rating agencies' business model, as well as flaws in their rating methods."

Michael Fallon, the Conservative deputy chairman of the committee, said today: "What can you do with them apart from bury them in concrete? They are hopelessly conflicted. We are looking at draft EU rules to try to resolve some of that."

Rating agencies are self-regulated, but the US Securities and Exchange Commission and the European Commission are looking at tougher rules.

Councils, charities and local authority bodies including Transport for London were attracted to the high interest rates offered by the Icelandic banks Kaupthing, Landsbanki and Glitnir and invested huge sums on terms ranging from a minimum of three months to up to two years.

The rating agencies, which include Fitch, Moody's and Standard & Poor's, claimed that they had been warning about the condition of the Icelandic banks for several months.

Recent research has highlighted the fact that risk analysts have also been involved in negotiating fees from their clients. The agencies acknowledge that credibility is vital but also argue that they must operate independently.

Treasury Committee chairman John McFall said in March: "The rating agencies have not emerged from the current episode of market turbulence smelling of roses. We need to have a serious debate about a root-and-branch reform of their business model to tackle perceived 'conflicts of interest'."

The EU said it could force institutions to do due diligence on complex securitisation rather than rely on rating agencies.