A final decision about whether the private security company will keep the job is pending, the department said. Moyock, N.C.-based Blackwater is one of the largest private military contractors, receiving nearly $1.25 billion in federal business since 2000, according to a House committee estimate.
Blackwater provides security for diplomats in Baghdad, where the sprawling U.S. Embassy is headquartered. Its private guards act as bodyguards and armed drivers, escorting government officials when they go outside the fortified Green Zone.
Iraqis were outraged over a Sept. 16 shooting in which 17 Iraq civilians were killed in a Baghdad square. Blackwater said its guards were protecting diplomats under attack before they opened fire, but Iraqi investigators concluded the shooting was unprovoked.
An FBI probe began in November. Prosecutors want to know whether Blackwater contractors used excessive force or violated any laws.
The State Department's top security officer, Greg Starr, told reporters Friday that because the FBI is still investigating the shootings, there is no justification now to pull the contract when it comes due in May.
Blackwater has a five-year deal to provide personal protection for diplomats, and its contract is reauthorized each year. The decision announced Friday extends Blackwater's deal for the third year.
Prosecutors investigating the shootings have questioned more than 30 witnesses in the U.S. and in Iraq, but they have announced no conclusions. One possibility is that individual contractors could be indicted, another is that the company could be indicted, or the FBI could conclude that there was no crime.
The company is also the target of an unrelated investigation into whether its contractors smuggled weapons into Iraq. Lawmakers have called for an investigation into whether Blackwater violated tax laws by classifying employees as independent contractors. The company says the claim is groundless.
Starr said that Blackwater's contract could be pulled at some future point, depending on what the FBI and an internal State Department inquiry conclude. He would not predict whether that is likely, and he said he has no information about when the FBI might act.
Starr's predecessor, Richard Griffin, resigned just one day after a State Department study found serious lapses in the department's oversight of private guards.
After the September deaths, U.S. commanders in Iraq complained that they often do not know security firms are moving through their areas of responsibility until after a hostile incident has taken place.
At the end of October, Defense Secretary Robert Gates met with Secretary of State Condoleezza Rice and reached a general understanding that more military control was needed over security firms operating in the war zone.
The Pentagon and the State Department agreed in December to give the military in Iraq more control over Blackwater Worldwide and other private security contractors.
The agreement spells out rules, standards and guidelines for the use of private security contractors and says contractors will be accountable for criminal acts under U.S. law. That partly clarifies what happens if a contractor breaks the law, but it leaves the details to be worked out with Congress.
The State Department also installed new safeguards after the September shooting, including a requirement for additional monitoring of Blackwater convoys.
Rep. David Price, D-N.C., author of a House-passed bill that would subject all contractors to criminal liability, called the agreement "an important step toward improving transparency, management and accountability in security contracting."
"There is no question that it comes in response to significant congressional pressure ... but the agencies deserve credit for reading the writing on the wall and taking substantive steps to deal with a clear and critical problem," Price said.