A £5MILLION fund for alleged sex abuse payouts had been put aside by county council bosses.

The move was announced as they revealed claims had been received by people who say they were abused while in the county council's care.

A £2million fund was earmarked in the last year's budget so the county council would be prepared for claims stemming from any convictions as a result of the long-running Operation Nevada police investigation.

Operation Nevada was launched in 2000 to look at allegations stretching back 30 years.

More than 800 former residents and care staff from seven county council-run care homes have been interviewed to discover whether there is a history of institutionalised sexual abuse in the county.

The probe includes people who lived in homes which are now part of Merseyside, Greater Manchester and Blackburn with Darwen authorities -- although Lancashire County Council will have to pay compensation claims.

Several people have been arrested in connection with the operation.

The additional £3million comes as a result of unexpected savings in last year's county council budget of more than £1billion, the final accounts of which were published last week. Another £500,000 will be added next year.

If no cases are forthcoming, the money will help finance payouts for third part highways claims, so called 'trips and slips' which cost the council around £6million a year.

Council leader Hazel Harding today warned that the money being in place did not mean the council would be a soft touch.

She said: "Every claim we receive will be thoroughly investigated and contested if need be.

"It makes financial good sense to prepare for what might happen in the future, rather than be taken by surprise."

The operation is one of the reasons Lancashire County Council's insurance excess continues to rise. This year, the county must pay the first £6million of all claims.

But a rising number of trips and slips claims, coupled with insurance firms' reluctance to insurance public bodies following September 11, has led to the possibility of that rising to £15million. Claims last year totalled £17million.

Other councils have found themselves facing huge compensation bills as the result of investigations, such as authorities in North Wales following the massive inquiry into child abuse in children's homes.

Nigel Evans, Welsh affairs opposition spokesman and Ribble Valley MP said: "This seems a sensible move following the events in North Wales, which showed that this is a widespread problem."