Halliburton, vice-president Dick Cheney's old employer, is the US military's biggest contractor in Iraq. It has been under increasing scrutiny by congress and government auditors, and is under investigation by the justice department for tens of millions of dollars in possible overcharges for its work in Iraq.

US army officials said the $16.4bn (£8bn) contract which gave a Halliburton subsidiary, Kellogg, Brown and Root, exclusive rights to provide food, shelter, laundry services and transport to US forces serving in Iraq would be subject to new bids later this year, and the work could be split between three companies. A fourth firm would be hired to monitor performance.

Officials said the army was satisfied with KBR's performance. But spokeswoman Betsy Weiner added: "The army frequently looks at the way it does business and tries to look at lessons learned and find a better way to do business. We believe that competition is perhaps a better way to do business."

Halliburton would be eligible to bid for the work.

News that it would no longer be guaranteed work in Iraq took an immediate toll on share prices, which fell in early morning trading. But spokeswoman Melissa Norcross said in a statement: "It is neither unusual nor unexpected."

Halliburton began reaping the profits of the war in Iraq even before the 2003 invasion, with a separate $7bn contract to repair the country's oilfields under the Iraqi reconstruction programme. The firm was later awarded the contract to provide logistical support to US troops.

In the last few years members of congress have been dogged in uncovering instances of waste and mismanagement by Halliburton and KBR.

Last year auditors uncovered $1.4bn in questionable charges by Halliburton. Former employees accused the firm of double billing on meals, grossly inflating the prices of services - $45 for a case of soft drinks - and allowing soldiers at Rammadi to bathe in contaminated water.

Halliburton defends its work in Iraq. "By all accounts, KBR's logistical achievements in support of the troops in Iraq, Kuwait and Afghanistan have been nothing short of amazing," a statement said. US army officials have also praised the company's record in Iraq, but the Pentagon evidently has decided that competitive contracts would result in better accountability and prices.

Henry Waxman, the Democratic congressman from California who has been one of Halliburton's harshest critics, welcomed the move but added: "The administration should have changed course a lot earlier. Its reliance on abuse-prone monopoly contracts in Iraq has cost taxpayers dearly."

The end of Halliburton's dominance in Iraq arrives at a time when the US is phasing out its role in Iraqi reconstruction. The Washington Post reported yesterday that 90% of the $18bn allotted by congress for rebuilding post-war Iraq has been spent or allocated. The rest of the money needs to be allocated by the end of September.