The US has suspended all road journeys by its diplomats in Iraq outside Baghdad's heavily fortified Green Zone.
This follows an incident in which 11 Iraqi civilians died when security guards from the US firm Blackwater opened fire in a busy Baghdad square.
Blackwater, which says its guards acted only in self-defence, has a contract to provide security to all US state department employees in Iraq. Iraqi PM Nouri Maliki has called on the US authorities to replace the firm.
"This crime has generated a lot of hatred in the government and the people against Blackwater," Mr Maliki said, the AFP news agency reported.
"For their own interests, the Americans should hire a new company to protect their people so they can move freely."
Mr Maliki again disputed Blackwater's account of the incident. He said he would not tolerate the "killing of our citizens in cold blood".
The prime minister said the Sunday's shooting was "the seventh of its kind" involving Blackwater.
The company has had all its operations in the country suspended by the Iraqi government.
The Iraqi interior ministry has said the men fired randomly at civilians in a crowded square in the capital in Sunday's incident, killing 10 innocent bystanders and a policeman.
On Tuesday, the US Secretary of State, Condoleezza Rice, telephoned Mr Maliki to express her regret over the deaths and pledge to help carry out a "fair and transparent" investigation into the incident.