Condoleezza Rice has ordered tougher rules to govern private security companies in Iraq, a month after a US firm was blamed for the death of 17 Iraqi civilians in Baghdad.

The US Secretary of State introduced a raft of new measures after hearing the recommendations of a panel designed to examine further regulation of thousands of private soldiers operating in Iraq.

The investigation had been called after the military contractor Blackwater USA was involved in a fatal shootout while working for the US Government. Political uproar in Iraq following the incident led to the company's licence being revoked. The furore sparked debate over the guidelines governing the well-paid militia employed to protect local individuals and Western officials.

The report presented to Ms Rice concluded that: "Prompt measures should be taken to strengthen the coordination, oversight and accountability aspects of the State Department’s security practices in Iraq in order to reduce the likelihood that future incidents will occur."

The recommended steps included tightening the state department's rules of engagement so they are in line with those of the military, improving cultural awareness training, tighter restrictions on the use of force, and setting up boards to investigate any future killings involving private contractors.

Patrick Kennedy, a State Department official who led the review, said that the Secretary of State "has decided to move ahead with the recommendations that are within her purview to act on immediately".

Ms Rice has ordered the appointment of a senior diplomat to oversee Iraq security operations. That job will be held temporarily by Steve Browning, a senior foreign service office who is now U.S. Ambassador to Uganda.

Panels will also be set up to investigate each shooting or other use of deadly force by private guards. The rules of engagement will be made more stringent bringing the State Department closer to emulating military rules for identifying a threat. The department will also require contractors to have Arabic speakers on hand.

The panel made 19 written recommendations, and Rice has adopted 11 so far, but further changes are likely after she meets Robert Gates, Defence Secretary, later this week.

Blackwater is the best-known private security company in Iraq. It has grown quickly since the 9/11 attacks six years ago to win contracts worth more than $1 billion from the US Government.

The Iraqi government is demanding that Blackwater be expelled from the country within six months and that its employees be subject to Iraqi law after the incident on September 16.

An Iraqi inquiry into the shootout in west Baghdad concluded that a Blackwater convoy did not come under fire — direct or otherwise — before its guards began shooting. Blackwater denies any wrong-doing.

The company’s 1,000 employees in Iraq are part of a "shadow army" where an estimated 180,000 private contractors outnumber the 160,000 US troops stationed in the country.

Iraqi, American and British government officials say that much of their work would grind to a halt without the help of private security expertise.

Modern armies have also created a market for hired muscle with private guards from countries such as Peru, Georgia and Nepal increasingly undertaking simple tasks such as guarding bases, transporting supplies, cooking and cleaning.

The explosion of the number of heavily armed private soldiers has led to fears over the level of scrutiny applied to their work.

Earlier this month, working from preliminary findings Ms Rice ordered that cameras be installed on all vehicles run by Blackwater and diplomatic federal agents accompany them on all convoys out of the international zone in Baghdad.

The report also identified a gap that left private guards for diplomats in Iraq outside the direct control of U.S. civilian or military law and outside Iraqi law.

"The legal framework for providing proper oversight of personal protective services contractors is inadequate," the report concluded.

Times Recommends

• Google to digitise Iraqi artefacts
• Renault angers parents by naming new car Zoé
• Analysis: most lawless part of Philippines