The move came even as the Iraqi government appeared to back down from statements Monday that it had permanently revoked Blackwater's license and would order its 1,000 personnel to leave the country - depriving American diplomats of security protection essential to operating in Baghdad.
"We are not intending to stop them and revoke their license indefinitely but we do need them to respect the law and the regulation here in Iraq," government spokesman Ali al-Dabbagh told CNN.
The U.S. order confines most American officials to a 3.5 sq. mile area in the center of the city, meaning they cannot visit U.S.-funded construction sites or Iraqi officials elsewhere in the country except by helicopter. The notice did not say when the suspension would expire.
The Iraqi Cabinet decided Tuesday to review the status of all foreign security companies. Still, it was unclear how the dispute would play out, given the government's need to appear resolute in defending national sovereignty while maintaining its relationship with Washington at a time when U.S. public support for the mission is faltering.
Prime Minister Nouri al-Maliki looked to gain political capital from the move against unpopular foreign security contractors. His government said Tuesday it would review the status of all foreign security firms working in the country.
Meanwhile, radical Shiite cleric Muqtada al-Sadr, who wields tremendous influence among regular Iraqis and many politicians despite his militia being one of the most feared in Iraq, called for a ban on all the companies of "the occupiers."
The State Department moved quickly to tamp down anger and possible repercussions after the alleged killings.
Secretary of State Condoleezza Rice telephoned Iraqi Prime Minister Nouri al-Maliki on Monday to express regret at the loss of life and promise that the results of an internal investigation into Sunday's incident would be shared with the government in Baghdad.
"She told the prime minister that we were investigating this incident and wanted to gain a full understanding of what happened," said deputy State Department spokesman Tom Casey. "She reiterated that the United States does everything it can to avoid such loss of life, in contrast to the enemies of the Iraqi people who deliberately target civilians."
Rice and al-Maliki "agreed on the importance of working closely together in the time ahead on a transparent investigation," Casey added.
Yassin Majid, an adviser to Iraq's prime minister, made no mention of the order to expel Blackwater, and it was unlikely the United States would agree to abandon a security company that plays such a critical role in American operations in Iraq.
If carried out, the order would deal a severe blow to U.S. government operations in Iraq by stripping diplomats, engineers, reconstruction officials and others of their security protection and the decision by al-Maliki's government was widely welcomed by Iraqis and likely to give the Shiite leader a political boost.
Also exploiting public rage over the killings of what police said were 11 civilians by Blackwater guards, anti-American cleric Muqtada al-Sadr demanded that the government ban all 48,000 foreign security contractors.
Al-Sadr's office in Najaf said the government should nullify contracts of all foreign security companies, branding them "criminal and intelligence firms."
"This aggression would not have happened had it not been for the presence of the occupiers who brought these companies, most of whose members are criminals and ex-convicts in American and Western prisons," the firebrand cleric said in a statement.
Al-Sadr insisted that the government of Prime Minister Nouri al-Maliki prosecute those involved and ensure that families of the victims receive compensation.
There was no threat by al-Sadr to unleash his Mahdi Army militia in retaliation for the killings.
However, his statement was significant because it signaled al-Sadr's intention to stir up anti-American sentiment in the wake of the weekend shootings and further undermine al-Maliki's U.S.-backed government.