The Iraqi government has approved a draft law revoking the immunity from prosecution private security contractors enjoy under Iraqi law.
Security contractors are currently immune from prosecution in Iraq
The law, which has been referred to parliament, would revoke an order set up after the US-led invasion in 2003.
The move comes six weeks after the fatal shooting of 17 Iraqi civilians in Baghdad by US firm Blackwater.
Earlier, reports said the US state department might have offered partial immunity to the guards involved.
The deals would protect the guards against prosecution for anything they might say in interviews as long as their statements were true.
But the US Department of Justice said the bureau had no right to grant immunity.
A state department spokesman would not confirm that any deals had been offered, adding that it tried to ensure that any lawbreakers would be "held to account".
The Baghdad shooting is currently being investigated by the FBI.
Correspondents say that if the reports of immunity deals do turn out to be true, that could further complicate the issue of how the guards could be tried.
In Baghdad, however, Iraq's government was adamant that contractors would have to obey its laws.
"The cabinet today approved a new draft law which puts all private security companies under the Iraqi law," Iraqi government spokesman Ali al-Dabbagh said.
"These companies will not get immunity and will be subject to Iraqi law."
Foreign guards would also be subject to searches at Iraqi checkpoints and be required to carry licences for weapons, Mr Dabbagh said.
An Iraqi probe into the Blackwater shooting blamed the US company
The bill must now be approved by the Iraqi parliament.
It is intended to replace Order 17 of the now-defunct Coalition Provisional Authority, which governed Iraq after the US-led invasion of 2003.
That order granted private security contractors immunity from prosecution in Iraq but made them subject to the law of their "sending state".
The BBC's Jim Muir in Baghdad says there is widespread anger after the shootings involving Blackwater, and there are many calls for those responsible to be put on trial.
But that is unlikely to happen in this particular case, our correspondent says, as the legislation would have to be applied retrospectively.
An Iraqi government investigation has concluded that Blackwater guards fired without provocation during the incident in Baghdad on 16 September and were "100% guilty".
Blackwater has insisted its staff acted only in self defence after insurgents fired upon the US diplomatic convoy they were protecting.
Last Wednesday, the head of the state department's diplomatic security division, Richard Griffin, resigned after a report said there should be far tighter supervision of private security personnel in Iraq.