The draft is being reviewed by senior Justice Department officials but no charging decisions have been made. A decision is not expected until at least later this month, people close to the case said.
Also still undecided is whether the Justice Department would charge the guards with manslaughter or assault, according to the people, all of whom spoke on condition of anonymity because they were not authorized to speak publicly about the case.
It's also possible that prosecutors ultimately will seek charges against as few as three of the guards, whose identities are still secret. Depending on the charges, an indictment would carry maximum sentences of five to 20 years.
An indictment would send the message that the Justice Department believes U.S. contractors do not operate with legal impunity in war zones. It's an untested legal theory, since the law is murky on whether contractors could be charged in U.S. courts, or anywhere, for crimes committed overseas.
The indictment against the Blackwater guards would be filed in U.S. District Court in Washington, even though the shootings occurred 6,200 miles away.
Blackwater guards opened fire in a busy intersection Sept. 16, 2007, in what witnesses said was an unprovoked attack. Young children were among the 17 civilians killed. The shootings outraged Iraqis and embarrassed the United States, further straining relations between the two nations.
Blackwater is adamant that its guards, who protect U.S. diplomats, were ambushed by insurgents in Baghdad's Nisoor Square.
Based in Moyock, N.C., Blackwater itself is not a target of the investigation. The company has pledged to cooperate with the investigation and said it wants to decrease its reliance on the security business.
Blackwater has been at the forefront of the debate over the use of contractors in war zones.
Capitol Hill lawmakers have described Blackwater guards as mercenaries. Human rights groups have sued the company. And Iraq's government is pushing for more authority to prosecute U.S. contractors in its own courts.
Among the issues under discussion at the Justice Department is whether prosecutors have authority to bring the case. The largest security contractor in Iraq, Blackwater operates in a legal gray area. Its guards are immune from prosecution in Iraqi courts and U.S. law does not normally apply to crimes committed overseas.
To prosecute, authorities must argue that the guards can be charged under a law meant to cover soldiers and military contractors. Since Blackwater works for the State Department, not the military, it's unclear whether that law applies to its guards.
It would be the first such case of its kind. The Justice Department recently lost a similar case against former Marine Jose Luis Nazario Jr., who was charged in San Diego with killing four unarmed Iraqi detainees. Jurors questioned whether such cases should even be brought in civilian courts.
"I don't think we had any business doing that," juror Nicole Peters said at the time. She wiped away tears after the August verdict and later hugged the defendant. "I thought it was unfair to us and to him."
Prosecutors will also face challenges over the evidence. Before the FBI began investigating the shooting, the State Department granted limited immunity to Blackwater guards who talked to investigators. The Justice Department will need to prove that its case was not influenced by any evidence gathered under that immunity deal.
Attorneys for six Blackwater guards made those arguments and more at a September meeting with top Justice Department officials. The lawyers urged prosecutors not to indict.
A decision before January about whether to indict the guards would mean that President-elect Barack Obama's incoming Justice Department team would not inherit the politically sensitive choice. But the legal hurdles will remain in a case that could drag on for a year or longer.
In December 2007, several months after the shootings, the Pentagon and the State Department agreed to give the military in Iraq more control over Blackwater and other private security contractors. Five months later, in April, the State Department renewed its multimillion-dollar contract with Blackwater for the third year of its five-year life.
Blackwater has been paid nearly $1.25 billion in federal business since 2000.