The ministry of interior yesterday took the decision to expel Blackwater after eight Iraqi civilians were killed and 13 wounded in Baghdad when shots were fired from a US state department convoy on Sunday.
Diplomats, engineers and other westerners in Iraq rely heavily on protection by Blackwater. The Iraqi decision created confusion on the ground, with uncertainty over whether protection was still available and whether Blackwater staff should leave the country immediately.
Ms Rice called the prime minister, Nuri al-Maliki, to apologise for the shooting. They agreed to run a "fair and transparent investigation", according to a statement from Mr Maliki's office.
It added: "She has expressed her personal apologies and the apologies of the government of the United States. She confirmed that the United Sates will take immediate actions to prevent such actions from happening again."
The office did not specify whether the apology was sufficient to reverse the expulsion decision.
The apology offers a face-saving exercise for both the Iraqi and the US governments. The US would find it temporarily awkward if Blackwater was expelled. At the same time, it does not want to be seen to be undermining the decisions of the Iraqi government, which the Bush administration repeatedly insists is autonomous.
There are tens of thousands of mercenaries - or private security operators - in Iraq, including British firms as well as American. Jeremy Scahill, author of a book about Blackwater, put the figure at about 180,000 and described them as "unaccountable". Blackwater has 1,000 employees in Iraq.
The private security firms are controversial and are often hated by Iraqis who regard them as trigger-happy. US soldiers can face court martial if accused of unprovoked assaults or over-reaction, though the ratio of those convicted is low. But the law in relation to private security firms is vague.
Brigadier-general Adam-Karim Khalaf, a spokesman for the interior ministry, said: "We have cancelled the licence of Blackwater and prevented them from working all over Iraqi territory. We will also refer those involved to Iraqi judicial authorities."
He said there would be prosecutions in relation to Sunday's deaths. He said foreign security contractors opened fire after mortar rounds landed near the convoy. "By chance the company was passing by. They opened fire randomly at citizens."
Jawad al-Bolani, the interior minister, said: "This is such a big crime that we can't stay silent. Anyone who wants to have good relations with Iraq has to respect Iraqis."
He told al-Arabiya television that foreign contractors "must respect Iraqi laws and the right of Iraqis to independence on their land. These cases have happened more than once and we can't keep silent in the face of them".
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