(Adds State Department comment, paragraphs 5-6)

By Aseel Kami

BAGHDAD, Sept 17 (Reuters) - Iraq said on Monday it had withdrawn the license of a U.S. security firm and would prosecute employees it said were involved in a Baghdad shooting in which 11 people were killed.

An Interior Ministry spokesman said guards working for Blackwater, one of the biggest foreign security contractors in Iraq, opened fire after mortar rounds landed near their convoy in west Baghdad's Mansour district on Sunday.

"They opened fire randomly at citizens," Brig. Gen. Abdul-Karim Khalaf said. Eleven people were killed, including one police officer, and 13 people were wounded, he said.

"We have withdrawn its license," Khalaf said. The ministry was investigating the incident and would "deliver those who committed this act to the court."

U.S. Secretary of State Condoleezza Rice called Iraqi Prime Minister Nuri al-Maliki to express her regret over the death of innocent civilians that occurred during the attack on a U.S. Embassy convoy, State Department spokesman Tom Casey said.

"She told the prime minister that we were investigating this incident and wanted to gain a full understanding of what happened," Casey said. Rice and Maliki agreed on the importance of working closely on a transparent investigation, he added.

A U.S. Embassy spokesman said the shooting took place after a car bomb exploded when U.S. diplomats were nearby.

"The car bomb was in proximity to a place where State Department personnel were meeting. That is why Blackwater responded to the incident," spokesman Johann Schmonsees said.

The embassy declined to confirm that Blackwater's license had been revoked.

Late on Monday, Blackwater said it had received no official notice from the Interior Ministry about it.

Blackwater, which employs hundreds of foreign contractors and is responsible for embassy security, said its guards had reacted "lawfully and appropriately" to a hostile attack.

"Blackwater regrets any loss of life but this convoy was violently attacked by armed insurgents, not civilians, and our people did their job to defend human life," spokeswoman Anne Tyrrell said in an e-mail.

U.S. House of Representatives oversight committee chairman Henry Waxman said he will hold hearings on the shooting. "The controversy over Blackwater is an unfortunate demonstration of the perils of excessive reliance on private security contractors," Waxman said.

Blackwater's distinctive small black helicopters hover in the skies above Baghdad and its armed vehicles shadow convoys of senior officials through the city.

Four Blackwater employees were killed in Falluja in 2004. Insurgents then burned their bodies and hung the charred remains from a bridge -- prompting an all-out U.S. military assault on the Iraqi city.

IRAQI CONDEMNATION

Maliki condemned Sunday's shooting and vowed to punish the perpetrators and their employers.

"We will work to punish and halt the work of the security company which conducted this criminal act," state television quoted him as saying.

The U.S. Embassy said it was seeking legal clarification on whether Blackwater employees could be prosecuted in Iraq.

Interior Minister Jawad al-Bolani said foreign contractors "must respect Iraqi laws and the right of Iraqis to independence on their land."

"These cases have happened more than once and we can't keep silent in the face of them," he told Arabiya television.

Tens of thousands of private security contractors, many of them American and European, have worked in Iraq since the U.S.-led invasion to topple Saddam Hussein in 2003. Many Iraqis believe they operate outside the law with little accountability either to the Iraqi government or U.S. military forces.

Khalaf did not say how many contractors were involved in the shooting. He said the investigating committee had gone to the scene and spoken to witnesses and would also visit the company's compound in Baghdad. (Additional reporting by Dominic Evans and Waleed Ibrahim in Baghdad, Arshad Mohammed in Washington)

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