MERCENARY guards who killed 17 Iraqi civilians when they opened fire on traffic in a busy Baghdad square last September are likely to escape trial or prosecution because of loopholes in US law.

The Blackwater private security firm employees facing indictment by a federal grand jury were given immunity by the US State Department when their company was hired four years ago to escort convoys and provide bodyguards for diplomats.

Despite pressure from the US military to have all security contractors brought under the same rules of engagement as soldiers, Blackwater's special deal is likely to make bringing the alleged culprits to court "difficult".

The security company has repainted all of the vehicles involved, removing potential evidence indicating whether they had come under attack.

Blackwater insists its guards returned fire after being shot at, although no weapons were found on any of the civilian victims at the scene.

The Iraqi government has demanded a full investigation, criminal charges where appropriate and the ending of Blackwater's work in the country.

Human Rights First, a leading US campaigning group, said that existing laws are sufficient to bring prosecutions, despite State Department interference.

They issued a report claiming that failure to bring contractors to account for civilian deaths was the result of a lack of political will by the White House and infighting between US government departments.