A US state department panel has urged the US to drop controversial security firm Blackwater as its main private security contractor in Iraq, US media has reported.

The panel has said that the firm's licence to operate in Iraq should not be renewed when it expires next year, the Associated Press has reported.

However, any decision on the recommendation will be left until Barack Obama, the US president-elect, enters office on January 20, reports say.

Condoleezza Rice, the US secretary of state, ordered a review of the state department's use of private security firms last September after 17 Iraqis died in a shooting incident involving Blackwater guards in the Iraqi capital, Baghdad.

Five guards were indicted earlier this month on manslaughter and other charges stemming from the incident in Baghdad's Nisoor Square last September.

A Blackwater spokeswoman would not comment on the report, AP said.

Immunity concern

It is reportedly not clear how the state department would replace Blackwater if the
recommendation is accepted, although officials told AP that the recommendation did not affect Blackwater contracts outside of Iraq.

The department currently relies heavily on private contractors, including Blackwater, to protect diplomats in Iraq as its own security service does not have the manpower or equipment to do so.

The firm has won more than $1 billion in government contracts during the Bush administration, many of them for work in Iraq where it protects diplomats based at the US embassy in Baghdad.

A controversial new US-Iraqi security pact lifts immunity for security guards in Iraq, a major source of contention for the Iraqi government, although it will be retained for on-duty US troops and contractors working with them.