The guards, who had been part of a convoy of armoured vehicles, had been charged with killing 14 unarmed Iraqi civilians and wounding 18 others in September 2007 at a busy Baghdad roundabout using guns and grenades.
But the guards claimed they acted in self-defence after a convoy they were protecting near Nisour Square came under attack.
However, witnesses and victims say the guards shot indiscriminately.
The Iraqi government called the US court ruling "unacceptable and unjust" and promised to support a lawsuit in US courts filed by victims of the shooting or their relatives.
Blackwater pulled out of Iraq in May, after the US state department refused to renew its contracts.
The company changed its name to Xe Services last year.