Liverpool was ranked among the worst for financial management

The council received "inadequate performance" ratings for its management of finances, financial reporting and standing, and overall performance.

Liverpool Council said it was in a "challenging financial position".

The Audit Commission report also ranked Northampton and Great Yarmouth councils as among the worst financially managed.

Liverpool councillor Keith Turner, executive member for resources, said the authority faced a budget shortfall, partly due to the Capital of Culture programme.

He said the council's poor rating was also due to it giving priority to investing in services such as new libraries, leisure centres and parks.

He said: "It is impossible to achieve all these essential improvements, while at the same time squirrel away tens of millions of pounds in the bank, which is what the audit inspectors would like.

BEST AND WORST Best financially managed: Bromley, Cambridge, Kent Worst financially managed: Great Yarmouth, Liverpool, Isles of Scilly Best value of money: Bedford, Tameside, Chorley Worst value for money: West Somerset, Berwick upon Tweed, Hart

"The government has just given Liverpool one of the worst grant settlements in the country � leaving the city with a huge shortfall. We are working hard to plug this gap by seeking out savings.

"But protecting services for children and the vulnerable, and keeping the council tax down, remains our priority - whatever accountants sat in London may think."

The report by the watchdog awarded scores for financial reporting, financial management, financial standing, internal control and value for money.

It awarded 40 councils with its highest score for overall performance.

Overall, the commission said councils were continuing to demonstrate improvement in financial management and delivering value for money.

It said its findings showed 70% of councils performed consistently above minimum requirements in 2007, which was an increase of 5% on 2006.

Steve Bundred, chief executive of the Audit Commission, said: "I am pleased to see that there are more councils performing at the highest level for each of the use of resources themes.

"In many cases it is evident that authorities have used the assessment to target improvements in areas where weaknesses had been identified and in doing so have been successful in improving their scores.

"However, there is still much scope for improvement."