WASHINGTON -- An internal State Department report says Blackwater Worldwide may lose its license to work in Iraq and recommends the agency prepare alternative ways to protect its diplomats there.
The 42-page report by the State Department's inspector general says the department faces "numerous challenges" in dealing with the security situation in Iraq, including the prospect Blackwater may be barred from the country.
The department would then have turn to other security arrangements to replace Blackwater, officials said.
"The department faces the real possibility that one of its primary Worldwide Personal Protective Services contractors in Iraq -- Blackwater (Worldwide) -- will not receive a license to continue operating in Iraq," the recently completed report says.
The report is labeled "sensitive but unclassified."
An official familiar with the report said initially it would recommend that department not renew Blackwater's contract when it expires next year.
But that specific language is not included in the document, a copy of which The Associated Press obtained. The official spoke on condition of anonymity because the report is not yet public.
The official said later that such a recommendation would not be made until after an investigation of last September's incident in Baghdad's Nisoor Square in which Blackwater guards killed 17 Iraqis is complete. Five guards have been indicted on manslaughter and other charges stemming from that incident. The company was not implicated.
The department had no immediate comment on the report.
It is not clear how the department would replace Blackwater. It relies heavily on private contractors to protect its diplomats in Iraq, as its own security service does not have the manpower or equipment to do so.
A decision on how U.S. diplomats in Iraq are to be protected will be left to the Obama administration, which will be in place when Blackwater's contract comes up for renewal in the spring.
Sen. John Kerry, the incoming chairman of the Senate Foreign Relations Committee, is a critic of Blackwater and the use of private security companies.
"The era of Blackwater must finally end," said Kerry, D-Mass.
But terminating the company's Iraq contract will be difficult for Obama's Secretary of State-designate Hillary Clinton because no other private security contractor has its range of resources.
The Moyock, N.C.-based Blackwater was founded by former Navy SEAL and Holland native Erik Prince.