In a statement issued by Unity Resources Group, the company said: The first information that we have is that our security team was approached at speed by a vehicle which failed to stop despite an escalation of warnings which included hand signals and a signal flare.
"Finally shots were fired at the vehicle and it stopped."
Ammar Fallah, a shopkeeper and witness to the shooting, said that the guards, who were escorting a civilian convoy through the streets, signalled for a woman driving a white Oldsmobile car to pull over as they passed.
"When she failed to do so they opened fire, killing her and the woman next to her," he said.
"There were two children in the back seat but they were not harmed. The women were both shot in the head."
"Iraq is still under foreign occupation and Iraqis continue to die in great numbers"
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Another witness, Sattar Jabar, said that the private car had moved too close to the convoy.
"It tried to avoid the convoy of four white SUVs of the foreigners, but it came close to the last vehicle, which then opened fire immediately."
Jabar confirmed that two women were killed, but said a third woman in the back seat had been wounded in the shoulder. One of the children had been struck by flying glass.
A policeman who heard the shots and came running to the scene said that after the shooting the security guards "rode away like gangsters".
Tough on security
The Iraqi government said on Monday it was determined to rein in private security contractors following the Blackwater shooting.
"We have set strict mechanisms to control the behaviour of the security companies and their conduct in the streets," Abdul Karim Khalaf, interior
ministry spokesman, said.
"We have set strict mechanisms to control the behaviour of the security companies and their conduct in the streets"
Abdul Karim Khalaf, Iraq interior ministry spokesman
The role of private security companies operating in Iraq has been under investigation since September 16, when Blackwater guards escorting a convoy of US diplomats opened fire in Baghdad's Nisoor Square.
An Iraqi government probe of the incident, which it said killed 17 civilians, found that the guards were not provoked and accused them of a "deliberate" crime.
"Employees of the company violated the rules governing use of force by security companies. They have committed a deliberate crime and should be punished under the law."
The Iraqi government would now take "judicial measures to punish the company," the statement said.
Blackwater, one of the biggest security firms working in Iraq with around 1,000 staff members, is employed to protect US government personnel in the country. It maintains its men were legitimately responding to an ambush while escorting a US state department convoy.
Iraqi and US officials have set up a joint commission to investigate the activities of private security companies in the country.