BAGHDAD, Oct 9 (Reuters) - The Iraqi government wants U.S. security firm Blackwater to pay $8 million in compensation to each of the families of 17 people killed in a shooting, a senior government source said on Tuesday.

The source said the figure was roughly in line with compensation paid by the Libyan government to the families of the 270 people killed in the 1988 Lockerbie airline bombing over Scotland.

"We want them to pay $8 million for each family," the source told Reuters. "The same level as the compensation for the Lockerbie victims."

Blackwater had been told of the demand, the source said. It was unclear what the private American firm's response was.

Iraqi government spokesman Ali al-Dabbagh said on Sunday an investigation set up by Prime Minister Nuri al-Maliki had found Blackwater "deliberately killed" the 17 people in the Sept. 16 shooting in western Baghdad.

Blackwater has said its guards responded lawfully to a hostile threat against a U.S. State Department convoy it was guarding, but Dabbagh said the investigation had also found there was no evidence they had come under fire.

The incident caused outraged among Iraqis who see security contractors like Blackwater as private armies which act with impunity.

Blackwater employs about 1,000 people in Iraq. Its founder, former U.S. Navy SEAL Erik Prince, told a Congressional hearing last week that his men had come under small-arms fire and "returned fire at threatening targets".

U.S. and Iraqi officials working on a joint committee have also begun investigating the shooting.

A larger U.S. inquiry into the operations of private contractors in Iraq is also under way, while U.S. Secretary of State Condoleezza Rice has ordered tighter controls on Blackwater.

The State Department will also send diplomatic security agents to accompany each convoy protected by Blackwater guards.

A Libyan intelligence agent was found guilty in 2001 of the bombing of a Pan Am flight over Lockerbie, which killed 270 people including 189 Americans.

In March 2003, Libya reached a political settlement with the United States and Britain to accept civil responsibility for the bombing, with Libya agreeing to pay about $2.7 billion in total compensation.

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