Auditors are being urged to investigate a secret deal between Thanet District Council and ferry firm TransEuropa after it emerged the company owed the council £3.3million.

The council is facing criticism over the deal in which it allowed the ferry firm to run up the seven-figure debt to try and keep it solvent.

It has been claimed councillors were kept in the dark over the arrangement, which began in 2011 and allowed TransEuropa to defer fees to the council so it could continue to operate.

The firm has now gone into administration, owing the council millions and leaving the authority facing a major financial headache.

Council chiefs have set out a cost-cutting package of measures aimed at covering the debts - including chopping £1m from its housing benefit budget.

A cabinet meeting to debate the savings is due to be held next Wednesday, but the ruling Labour administration is already facing questions about why TransEuropa was allowed to run up such debts.

It has emerged the company had made three monthly repayments to the council of £80,000 between July 2012 and September 2102, but then stopped.

Cllr Ian Driver, who now represents the Green Party and chaired the council's backbench watchdog committee until earlier this year, said he had already written to the District Auditor asking for an inquiry.

"This was a secret deal and it stinks. I am all in favour of doing things to improve the economy, but when things get out of control and debts escalate like this, someone should have stepped in."

He said details of the arrangements with the ferry firm had never been shared with the full council and could have been in breach of the authority's constitution.

"In the two years I have been a councillor, it has never been discussed by anyone - even as a confidential item. It would be impossible for the council to investigate what went wrong as both councillors and officers had been involved."

In a statement, Labour council leader Clive Hart said the commercially confidential agreement was first agreed by the former Conservative administration in March 2011.

"This was a secret deal and it stinks. I am all in favour of doing things to improve the economy, but when things get out of control and debts escalate like this, someone should have stepped in..." - Cllr Ian Driver

He said a decision was taken to continue the deal even though the debts were already stading at £1.7m because it wanted to protect jobs.

Cllr Hart said: "We take responsibilty for our actions since December 2011 but in our view, officers and elected members have done what they could do to protect the best interests of the district in a very difficult situation.

"The purpose of this arrangement was to give every possible chance for the continuation of the ferry service at the port and to protect both the jobs that depended on it and an important source of income."

The council may be limited in what it can hope to recover the money owed.

It has been forced to make public the details of how it intends to cover the £3.3m owed under accountancy rules.