Iraq's interior ministry said yesterday it wanted to impose legal boundaries on the private security business after American contractors twice opened fire on US marines.
The move may be supported by the US military, whose patience with the contractors has been tested.
They were angered by an incident late last month in Fallujah, the former insurgent stronghold recaptured by US forces last year.
The marines say one of their combat teams came under fire from guards in a convoy of four-wheel-drives belonging to Zapata Engineering, a firm based in North Carolina that is involved in reconstruction projects.
A marine observation post was fired at three hours later by the same convoy, according to Lt Col Dave Lapan, a marines spokesman.
The contractors' vehicles were eventually stopped by metal spikes in the road.
Soldiers promptly arrested the security men, including 16 Americans and three Iraqis, who were placed in a detention centre. They have since been sent home.
The Zapata employees have admitted firing at civilian vehicles but deny targeting marines. They said that while in custody they were physically and emotionally abused.
The lawyer, Mark Schopper, who is representing two of the contractors, claims that at one point a marine shouted at the men: "How does it feel to be a rich contractor now?"
Soldiers have for some time been angered by the salaries earned by the estimated 20,000 armed contractors working in Iraq, many of whom are ex-servicemen.
It is common for them to earn Â£750 a day. They provide protection for senior government officials and reconstruction projects.
They are even more unpopular with Iraqis. Interior ministry officials say at least 12 Iraqi civilians are killed by contractors every week in the capital.
"Enough is enough," said an official at the interior ministry. "We are looking at ways to tighten weapons licenses, and to punish the worst cases. The culture of impunity must stop."
A senior member of one private security firm in Baghdad said: "Like it or not we are combatants. If our guarantees are removed, we would have to leave."
- 174 War & Disaster Profiteers Campaign