COUNCILS in the North-East will receive the smallest increase in Government grant next year - prompting fears of council tax hikes and service cuts.

The region is to receive an extra £42m from the Government, an increase of only 2.7 per cent for the year 2006-2007.

The situation is not much better for 2007-2008, when the North-East will receive an extra £55m, or 3.5 per cent - again, one of the smallest increases in the country.

However, there are some winners locally, with Wear Valley District Council awarded an additional £0.5m, an eight per cent increase.

The figures, released by the Government yesterday as part of the pre-Budget report, came as the Government said tax rates should rise by less than five per cent next year.

Local Government Minister Phil Woolas said: "This settlement means high council tax increases are a thing of the past and we will not tolerate excessive council tax increases either next year or in years to come," he said.

The additional cash for local authorities has been reallocated from Whitehall departments.

However, last night the deal - which may still mean council tax hikes of twice the rate of inflation - was criticised by local government leaders.

Councillor Peter Allen, executive member for resources at Newcastle City Council, said the city had received a very low grant which would mean budget and service cuts.

"The budget statement for this year is very disappointing and will put severe pressure on the council to continue to provide quality services and maintain low council tax," said Coun Allen.

"This two per cent increase, or £2.9m, is the lowest grant increase of any similar authority and, even after making substantial efficiency cuts, will result in budget and service cuts."

Chairman of the Local Government Association, Sir Sandy Bruce-Lockhart, said: "The deal is better than was expected, but still leaves many councils having to face tough choices between council tax increases and cutting services.

"Local authorities across the country will now be working round the clock to make sure council tax is kept as low as possible without having to cut services. Councils are making efficiency savings of £58m a month, which is more than any other part of the public sector."