On Wednesday, Ali al-Dabbagh, an Iraqi government spokesman, released a statement saying: "The cabinet held a meeting yesterday and decided to scrap the article pertaining to security companies operating in Iraq that was issued by the CPA (Coalition Provision Authority) in 2004."
On Wednesday, the Iraqi government revoked the immunity from prosecution granted to private security firms.
The immunity granted to companies such as Blackwater had become more controversial since a series of shootings involving their employees.
The most infamous incident was on September 16 in which employees of Blackwater allegedly killed 17 Iraqis in Baghdad.
"The actions of these contractors will ultimately reflect on coalition forces in general"
Kyle, Fremont, US
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The Blackwater guards were said to have opened fire when they were escorting a US state department convoy through a Baghdad neighbourhood.
"It has decided to present a new law regarding this issue which will be taken in the next cabinet meeting."
The CPA stipulated that the "multinational force, foreign liaison missions, their personnel, property, funds and assets and all international consultants shall be immune from Iraqi legal process.".
On October 9 guards of Australian security company Unity Resources Group fired upon a car in central Baghdad killing two women, and on October 18 guards of a British security company fired on a car wounding three people.
On Wednesday, Blackwater USA said it supported recommendations by a State Department panel to boost oversight of contractors in Iraq.
Officials said that Condoleezza Rice, the US secretary of state, was adopting "immediately" the recommendations of a review panel that exposed a worrying legal impunity for security guards working in the two countries.
In an implicit admonishment, the panel of experts who produce the report stressed that private contractors should open fire only with "due regard for the safety of innocent bystanders".
The Blackwater shooting laid bare a lack of accountability for firms working for the US state department rather than the Pentagon, whose private contractors are covered by US military law.
Washington has been increasingly dependent on contractors to protect its civilian staff in Iraq as the military has been fully occupied tackling Sunni fighters and sectarian militias.