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Iraq will not renew the licence of US security firm Blackwater, which was involved in an 2007 incident in which at least 14 civilians were killed.
An interior ministry spokesman said the US embassy had been told it will have to use another security company.
Five former Blackwater guards have gone on trial in the United States over the killings in Baghdad.
They have pleaded not guilty to killing 14 Iraqi civilians and wounding 18 others by gunfire and grenades.