Local authorities also worry that Christian groups would be biased to people of the same faith, according to the Labour MP Stephen Timms.
The politician, a Christian, is promoting the Faith Covenant which aims to encourage dialogue between councils and faith-based organisations.
"Council officers are pretty wary about dealing with faith-based groups," Timms told Premier.
"They worry that if they commission a service from a faith-based group that maybe the money is going to be used to try and convert people instead of providing the service."
He also warned that council bosses fear Christian groups would provide a better service to people of the same faith.
"In practice I don't think either of those two things happen," he stressed. "It's surprising how anxious council officers can be about this so the aim of the covenant is to spell out the assumptions and the commitments on both sides."
The Faith Covenant is already being used in six local authorities including Birmingham, Leeds and Barnet in North London.
It was created by the All-Party Parliamentary Group on Faith and Society to support faith groups and local authorities in working together.
It is described as a joint commitment between the two to a set of principles which will guide engagement, working to remove the mistrust they face and promote open and practical work.
Timms, who chairs the APPG on faith, also told Premier national and local government had to "recognise just how much potential there is in churches".
He said: "The truth is that actually religious faith is the best foundation for the solutions that we need in our society."
Stephen Timms speaking to Premier's Antony Bushfield:
