A US embassy official in Baghdad and Khalaf gave no exact exit date for Blackwater employees.
They also did not clarify whether the Blackwater guards would be allowed to continue guarding US diplomats until a date is decided.
"We don't have specifics about dates. We are working with the government of Iraq and our contractors to address the implications of this decision," the US embassy official said.
Blackwater employees who have not been implicated in the 2007 shooting incident will be allowed to work with a different employer in Iraq.
The security contracting company deny any misconduct over the shooting. They say guards opened fire after coming under attack when a car in a US state department convoy broke down in Baghdad's Nisoor Square.
Erik Prince, Blackwater's founder, acknowledged that the loss of the contract would hurt the company, but said that the company's exit from Iraq would also endanger the diplomats it has protected.
"Our abrupt departure would far more hurt the reconstruction team and the diplomats trying to rebuild the country than it would hurt us as a business," he said.
The decision not to renew the Blackwater contract comes in the wake of a US-Iraqi security agreement approved in November which gives Iraq the right to decide which Western security companies can work in Iraq.
Gary Jackson, Blackwater's president, said it will remove its nearly two dozen aircraft and 1,000 security contractors from Iraq within 72 hours of receiving an order to leave.
Up until the beginning of this year, Western security contractors enjoyed blanket immunity from Iraqi law.
This has since been reversed to allow security contractors to be prosecuted in Iraq.