Local authorities are facing the threat of industrial action after announcing that 1.6 million council workers are to have their pay frozen for the third year in a row.

Unions reacted furiously after being told by the Local Government Association (LGA) that more jobs and services would be cut if they ended a two-year pay freeze for workers across England, Wales and Northern Ireland in April.

Officials branded the decision a "disgrace" and warned of industrial action if the issue is not taken to a tribunal. Council employers blamed the "unprecedented" move on rising costs and shrinking funding for council services.

Sarah Messenger, head of workforce at the Local Government Association, said: "This has been a very difficult decision to make but it is the right one for council taxpayers and the workforce as a whole.

"A combination of rising costs and shrinking local government funding means councils were left with little choice. Increasing pay would mean more job losses and cuts to the services people need.

"Today's announcement represents an unprecedented third consecutive year of pay freeze and we recognise the frustration which will be felt by the workforce. While the financial outlook for councils is bleak, we are keen to begin discussions with the unions on a package of reform of pay and conditions that may enable us to avoid a fourth year of pay freeze in 2013."

Brian Strutton, national officer of the GMB, warned that his union would consult its members over industrial action if employers refused to go to arbitration: "Council leaders' pay has shot up and councillors vote themselves higher allowances while the carers, dinner ladies, dustmen, social workers, school support staff and all the other council workers serving their communities will have seen their pay fall in real terms by over 15%."

Unison's head of local government, Heather Wakefield, said: "Many local government workers are in work, but in poverty. It is a disgrace that pay will be frozen for the third year running, forcing even more into the poverty trap. Many of them will be women working in vital jobs in our local communities, like caring for the elderly, or for young children, or helping the vulnerable."

Unite national officer Peter Allenson said local government workers were under "sustained attack", adding: "Staff have endured a decade of below inflation pay increases and freezes. Now attacks on pensions, conditions and massive job cuts have heaped misery upon misery."

The announcement comes amid the bitter dispute over public sector pensions, which has still not been resolved. More than 1.5 million workers, including council staff, went on strike last year in protest at Government reforms, and some unions are threatening fresh action, possibly next month.