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By Dominic Evans

BAGHDAD, Oct 7 (Reuters) - Iraq said on Sunday security guards from the U.S. firm Blackwater "deliberately killed" 17 Iraqis in last month's shooting incident in Baghdad and that it would take legal steps against them.

Government spokesman Ali al-Dabbagh said an investigation set up by Prime Minister Nuri al-Maliki found no evidence that the U.S. security firm had come under fire during the incident.

"What they committed is considered a crime of deliberate killing and they must be held accountable according to the law," Dabbagh said, adding the company itself could face legal action.

Dabbagh's toll from the shooting was higher than the 11 deaths previously reported by Iraqi officials and the tone of his statement suggested Iraqi anger over the Sept. 16 still burns strongly.

Blackwater, which employs 1,000 people in Iraq to protect U.S. State Department officials, has said its guards reacted lawfully to an attack on one of its convoys.

Blackwater's founder, Erik Prince, said in remarks prepared for a Congressional hearing last week that his men came under small-arms fire, including from people wearing police uniforms, and "returned fire at threatening targets".

Dabbagh said there was "no evidence that the Blackwater convoy came under any direct or indirect fire, or that it was even hit by stones".

His statement was released on the same day a separate committee made up of U.S. and Iraqi officials met for the first time to review the operations of foreign security firms in Iraq.

A U.S. embassy statement said the joint commission, headed by Iraq's defence minister and a senior U.S. diplomat, will put forward proposals to ensure that security firms guarding U.S. officials "do not endanger public safety".

It did not say when the committee would complete its work.

U.S. Secretary of State Condoleezza Rice has ordered tighter controls on Blackwater including putting cameras on its convoys. The State Department also plans to send diplomatic security agents to accompany each convoy protected by Blackwater guards.

Iraq says there are more than 180 mainly U.S. and European security companies in Iraq, with estimates of the number of private contractors ranging from 25,000 to 48,000.

Many Iraqis resent their presence, seeing them as private armies which have shot and killed civilians with impunity.

A U.S. Congressional report released last week said Blackwater had been involved in at least 195 shooting incidents in Iraq since 2005. In 84 percent of those cases, it said Blackwater personnel were the first to open fire.

Under a 2004 ruling issued by the U.S.-led authority which ruled Iraq after the overthrow of Saddam Hussein, the firms are immune from Iraqi law.

But Dabbagh said Iraq's cabinet would look at recommendations from Maliki's committee and the joint U.S.-Iraqi investigation and "take the legal steps to hold the company to account".

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