A Christian cross dangled from the inside mirror of the car

An Australian-run firm confirmed one of its teams had opened fire after a car failed to heed warnings to pull away, and said it regretted the deaths.

One Iraqi policeman likened the guards to "gangsters riding away".

The conduct of Western security firms in Iraq is already in question after a shooting in Baghdad last month.

'Warnings, then shots'

In a statement released to the BBC News website, Unity Resources Group, which is run out of Dubai, said it was aware of a shooting incident involving one of its security teams.

Our security team was approached at speed by a vehicle which failed to stop despite an escalation of warnings

Unity Resources Group

"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," the statement said.

"Finally shots were fired at the vehicle and it stopped."

Unity was, it added, "working with the Iraqi authorities" to investigate the outcome of the incident.

In a later statement, the company said its team had feared a suicide attack as that part of Baghdad, Karrada, had "been subject to vehicle suicide bomber attacks in recent weeks".

Karada saw a spate of car bomb attacks during the summer but is nonetheless considered one of Baghdad's safer areas.

Women and children

According to eyewitnesses, the masked security guards threw a smoke bomb and opened fire on a car which was driving close to the four-vehicle convoy they were protecting.

[Dead Iraqi driver Marou Awanis] was a part-time taxi-driver trying to make ends meet

Abu Mairam

Relative of victim

Two women in the car were killed and a third was injured.

One eyewitness, shopkeeper Ammar Fallah, said the guards had signalled for the car's woman driver to pull over as they passed.

"When she failed to do so they opened fire, killing her and the woman next to her," he told AFP news agency.

"There were two children in the back seat but they were not harmed. The women were both shot in the head."

Relatives at a local police station identified the dead women as Marou Awanis, 48, and Geneva Jalal, 30, both members of Iraq's small Christian minority.

Marou Awanis was a widowed "part-time taxi-driver trying to make ends meet and to pay for the education of her two children", relative Abu Mairam told AFP news agency.

Inquiry launched

Iraqi government spokesman Ali al-Dabbagh said an investigation was under way into the incident.

A US embassy spokeswoman quoted by Reuters news agency said the convoy had not been carrying its staff.

On Monday, the Iraqi government demanded that the US security firm Blackwater pay $8m (£3.9m) compensation to each family bereaved by last month's shootings in Baghdad, which killed 17 people.

Blackwater has the contract for guarding US embassy staff and is also used both by visiting businesspeople and officials.

It insists its staff were acting in legitimate self-defence, and that they had come under fire from insurgents.

Iraq's government is demanding the US end its association with Blackwater and has vowed to put such firms under Iraqi jurisdiction.