BAGHDAD (Reuters) - Iraq wants to tighten control over security contractors after a deadly shooting incident involving the U.S. firm Blackwater, ending their long immunity from Iraqi prosecution, the Interior Ministry said on Friday.

Blackwater guards were back on the streets of Baghdad on Friday after the U.S. Embassy eased a three-day ban on road travel by U.S. officials outside the capital’s heavily fortified Green Zone.

Interior Ministry spokesman Maj. Gen. Abdul-Kareem Khalaf said the ministry had drafted legislation giving it wider powers over the contractors and calling for “severe punishment for those who fail to adhere to the ... guidelines.”

Iraq has said it would review the status of all security firms after what it called a flagrant assault by Blackwater contractors in which 11 people were killed while the firm was escorting a U.S. Embassy convoy through Baghdad on Sunday.

Prime Minister Nuri al-Maliki suggested the U.S. Embassy should stop using Blackwater and said he would not allow Iraqis to be killed “in cold blood.”

U.S. Secretary of State Condoleezza Rice said on Friday she had called for a full review of State Department security policy in Iraq.

“I take very seriously, and called up Prime Minister Maliki to regret, the loss of life,” she told reporters in Washington.

U.S. Embassy spokeswoman Mirembe Nantongo said the decision to allow “mission essential” trips, some guarded by Blackwater, was taken after consultation with Iraqi authorities.

“There isn’t a lot of movement in general ... But it is likely Blackwater will support some of them,” she said.

The shooting has incensed Iraqis who regard the tens of thousands of security contractors working in the country as private armies that act with impunity.

Khalaf said the new draft law, which he expected parliament to pass soon, gives the ministry powers to prosecute the companies and to refuse or revoke contracts.

U.S. State Department spokesman Tom Casey said he hoped Iraqi authorities would coordinate with the United States before passing legislation on security contractors.

“They are free to pass whatever legislation they deem appropriate. It’s their country,” Casey told reporters in Washington. “What I think we would hope, though, is that before anybody move forward on their own that what we could do is have a discussion about some of these issues ... that it be done in that kind of coordinated manner.”

NEW RULES

Many security firms operating in Iraq have no valid license. A law issued by U.S. administrators after the 2003 invasion which overthrew Saddam Hussein granted them immunity from prosecution and has not been formally revoked.

The New York Times reported on Friday that the Interior Ministry will also propose that foreign security companies be replaced by Iraqi firms.

“These American companies were established in a time when there was no authority or constitution,” the newspaper quoted a ministry report as saying.

A U.S. soldier of Bravo company, 2nd Battalion, 17th Field Artillery Regiment walks during a patrol in the Zafraniya neighborhood in the southeast of Baghdad, September 20, 2007. REUTERS/Carlos Barria

The head of an association of security firms in Iraq said replacing foreign companies with Iraqi security companies was not a new suggestion and was unlikely to happen overnight.

“One alternative would be partnerships with Iraqi companies, putting an Iraqi face on what we’re doing,” Lawrence Peter, director of the Private Security Company Association of Iraq, told Reuters.

Peter said about 30,000 people, half of them Iraqis, worked for security firms in Iraq.

U.S. and Iraqi officials have launched a joint inquiry into Sunday’s deadly shooting incident involving Blackwater, which employs around 1,000 contractors to protect the U.S. mission and its diplomats from attack.

In the latest violence, one U.S. soldier was killed on Thursday by a bomb near his vehicle in Diyala province, east of Baghdad, the military said.

The Romanian Defense Ministry said a Romanian soldier was killed and five others were severely wounded in an explosion on Friday during a patrol next to their base in Tallil in the south of the country.

In the southern city of Basra gunmen killed Sheikh Amjad al-Jinabi, a religious aide to Iraq’s top Shi’ite cleric Grand Ayatollah Ali al-Sistani on Thursday evening after he had attended a funeral in the Shi’ite city, Sistani’s office said.

Another Sistani aide was killed in a drive-by shooting in Diwaniya, 180 km (110 miles) south of Baghdad, police said.

Some Shi’ite mosques in Basra canceled Friday prayers in protest at the killings, residents said.