The US has accepted that foreign contractors in Iraq will no longer have immunity from Iraqi law under a new security agreement now under negotiation, says the Iraqi Foreign Minister, Hoshyar Zebari.

Mr Zebari, speaking to The Independent in Washington, said that if there was a further incident like the one in which 17 Iraqis were killed by workers from the Blackwater security company in Baghdad last September, the Iraqis would arrest and punish the contractors held responsible.

The American concession would have a serious effect in Iraq, where there are an estimated 160,000 foreign contractors, many of them heavily armed security personnel. The contractors, who outnumber the 145,000-strong US Army in the country, have become a vital if much-resented part of the military machine in Iraq.

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Mr Zebari, Foreign Minister since 2004 and one of the ablest Iraqi leaders, defends the security deal now being negotiated, in contrast to Iraqi critics who say it turns the country into an American client state. On Friday the Iraqi Prime Minister Nouri al-Maliki said negotiations on twin political and military agreements between the US and Iraq had "reached a dead end".

Later, after a phone call from Mr Zebari, Mr Maliki backtracked from his earlier statement. But details of the American proposals, first published in The Independent, have been denounced in Iraq for making the US occupation permanent. Mr Zebari contends that nothing is yet agreed and the American side is showing flexibility under instructions from President Bush. "I am using this example [the ending of immunity for US contractors] to show that talks have not reached a dead end," he said.

The Iraqi Foreign Minister is in Washington for talks about the negotiations on the Status of Forces Agreement (Sofa), covering critical issues of military co-operation between the US and Iraq, and the parallel Strategic Framework Agreement that covers political and other issues.

He is also establishing official contact with the presidential candidates, briefing John McCain on the situation in Iraq, and was due to speak to Barack Obama yesterday. In speaking to Senator Obama he said he wanted to reassure him that the purpose of the Sofa was not to pre-empt different policies that might be adopted by a new president. Mr Obama has told Iraqi officials that, if elected, he will not act precipitately on Iraq and will seek the views of the American military commander on the spot.

Critics of the agreement in Iraq see the powers being demanded by the US, such as the use of 58 bases, the freedom of the US to carry out operations and arrests without consulting the Iraqi government, and the immunity of US troops, as compromising Iraqi independence. They have denounced the deal as ominously similar to the Anglo-Iraqi treaty of 1930 under which Iraq was nominally independent but Britain retained bases and covert control.

Other shifts in US proposals being discussed are a joint Iraqi-American centre to co-ordinate operations against terrorists and the transfer of prisoners, currently numbering 21,000, to Iraqi custody. The Iraqi side has been investigating how other Sofas operate in other countries such as Japan, South Korea and Turkey, but in none of these are US troops involved in combat or the target of armed resistance.

Mr Zebari says Iraq still needs US troops' support. Its security forces number 600,000 but lack training and logistical support. Mr Maliki's government is more confident since it sent forces into Basra, Sadr City and Mosul earlier this year but it is not clear if they would have held their ground without US firepower, air support and advice.

President Bush is pushing for the Sofa and the less important Strategic Framework Agreement to be signed by 31 July.

*A powerful car bomb exploded in a crowded market in Baghdad yesterday, killing 51 people and wounding 75, in the biggest attack in the Iraqi capital in months. The market was in the predominantly Shia neighbourhood of al-Hurriya in north-west Baghdad.