BAGHDAD, Iraq (CNN) -- Iraq will not grant an operating license to security firm Blackwater Worldwide, an Interior Ministry official said Thursday.

Heavily armed Blackwater guards scan downtown Baghdad, Iraq, from a helicopter in 2003.

Ministry spokesman Maj. Gen. Abdul Karim Khalaf said the ministry denied the request mainly because of a September 2007 shooting incident in which security guards employed by Blackwater fired on a crowd and killed 17 Iraqis, according to the government.

A U.S. Embassy official in Baghdad, who asked not to be named, confirmed the report.

"We have been informed that Blackwater's ... operating license will not be granted," the official said. "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."

Blackwater has one of the biggest security contracts in Iraq. The U.S. State Department, which contracted the company to protect American diplomats and other employees, is also "looking at the implications" of the decision, said Robert Wood, the department's acting spokesman.

Wood didn't say what specific plans the State Department has to protect its employees, but he told reporters that State will encourage contractors to abide by Iraqi law, as required under the recently approved U.S.-Iraqi security agreement, and will make sure its personnel are protected.

"We're formulating how to go forward," he said. Watch report on Iraq's refusal to grant license to Blackwater »

Wood refused to say whether two other security companies working in Iraq, Triple Canopy and Dyncorp, would take over security operations, but did say those options were being considered.

Earlier this month, five former Blackwater security guards pleaded not guilty to charges of voluntary manslaughter and other serious crimes stemming from their involvement in the September 16, 2007, shootings in a Baghdad square.

A sixth former security guard has pleaded guilty to voluntary manslaughter and attempted manslaughter.

Blackwater says its employees were returning fire after they were attacked by armed insurgents, but an Iraqi investigation concluded that the guards randomly fired at civilians without provocation.

The company does not face any charges. But the Baghdad incident exacerbated the feelings of many Iraqis that private American security contractors have operated since 2003 with little regard for Iraqi law or life.

The indictment of the five men represents the first prosecution of non-Defense Department contractors under the Military Extraterritorial Jurisdiction Act (MEJA). The act was amended in 2004 to allow the Justice Department to prosecute such personnel providing services "in support of the mission of the Department of Defense overseas."

A security agreement approved in December 2008 specifies U.S. civilian contractors will no longer be immune from Iraqi prosecution for crimes committed in Iraq.

Iraq has required the licensing of private security companies since 2004, but the provision was not strictly enforced.

Last year, the State Department renewed Blackwater's contract over strong objections from the Iraqi government.

Starting January 1, the Iraqi government has mandated that all contractors obtain licenses to operate.

CNN's Jomana Karadsheh contributed to this report.

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