Blackwater's image in Iraq was irrevocably tarnished by the September 2007 killing of 17 Iraqi civilians in Nisoor Square. Five former Blackwater guards pleaded not guilty Jan. 6 in federal court in Washington to manslaughter and gun charges in that shooting.
The decision not to issue Blackwater an operating license was due to "improper conduct and excessive use of force," said Interior Ministry spokesman Maj. Gen. Abdul-Karim Khalaf.
Neither Khalaf nor a U.S. Embassy official gave a date for Blackwater personnel to leave the country and neither said whether they would be allowed to continue guarding U.S. diplomats during the interim.
A U.S.-Iraqi security agreement approved in November gives the Iraqis the authority to determine which Western security companies operate in Iraq.
Blackwater employees who have not been implicated in the shooting have the right to work with a different employer.
"We sent our decision to the U.S. Embassy last Friday," Khalaf told The Associated Press in a phone interview. "They have to find a new security company."
The U.S. Embassy official confirmed it received the government's decision, saying that U.S. officials were working with the Iraqi government and its contractors to address the "implications of this decision."
The official made the statement on condition of anonymity under embassy regulations.
In the 2007 shooting, Blackwater maintains its guards opened fire after coming under attack after a car in a State Department convoy broke down.
The Iraqi government has labeled the guards "criminals" and is closely watching the case.