Blackwater, which says its guards acted only in self-defence, has a contract to guard all US State Department employees in Iraq.
Iraqi PM Nouri Maliki has called on the US authorities to replace the firm.
"This crime has generated a lot of hatred in the government and the people against Blackwater," Mr Maliki said, the AFP news agency reported.
US embassy in Baghdad
"For their own interests, the Americans should hire a new company to protect their people so they can move freely."
Mr Maliki again disputed Blackwater's account of the incident. He said he would not tolerate the "killing of our citizens in cold blood".
The prime minister said the Sunday's shooting was "the seventh of its kind" involving Blackwater.Read More