By Paul Tait

BAGHDAD (Reuters) - Iraq said on Monday no action would be taken against U.S. private security firm Blackwater over a shooting in which 11 people were killed until after a joint investigation with U.S. officials.

Prime Minister Nuri al-Maliki had vowed to freeze the work of Blackwater, which guards the U.S. embassy in Baghdad, and prosecute its staff over what he termed a "flagrant assault" eight days ago but Iraq has since appeared to soften its stand.

The shooting in western Baghdad angered many Iraqis, who see the thousands of private security guards working throughout Iraq as private armies who act with impunity, immune from prosecution under an order drafted after the 2003 invasion.

Government spokesman Ali al-Dabbagh said that Blackwater's future would rest on the outcome of a joint inquiry by Iraqi and U.S. officials into the conduct of private security companies.

The U.S. embassy is conducting a separate inquiry into the circumstances of the shooting, in which Blackwater guards are accused of opening fire without provocation. Blackwater says its guards reacted lawfully to an attack on a U.S. convoy.

"The government will take the necessary legal measures against Blackwater depending on the investigation's results," Dabbagh said in a statement issued from New York, where Maliki will attend the U.N General Assembly.

"The souls of Iraqis and their dignity are above everything else for us."

Soon after the incident Maliki suggested the U.S. embassy should stop using Blackwater and said he would not allow Iraqis to be killed in cold blood.

But, since U.S. Secretary of State Condoleezza Rice promised a full review of how U.S. security details are conducted, Iraqi security officials have echoed Rice's words in saying private guards perform important work in Iraq.

A Baghdad security official said on Sunday their expulsion would leave a "security vacuum."

Dabbagh said the joint committee investigating the incident had held its first meeting on Sunday and that its work should be done quickly "because there is an anger in the streets in Iraq."

He said that companies like Blackwater were not entitled to act without accountability despite the importance of their work.

Iraq is reviewing the status of all private security firms, which employ between 25,000 and 48,000 guards, while the Interior Ministry is drawing up legislation giving it wider powers over security contractors.

Foreign security firms operate in Iraq under a law, issued by U.S. administrators after the 2003 invasion to topple Saddam Hussein, which granted them immunity from prosecution and has not been formally revoked. Many do not have valid licenses.

In Baghdad, the trial of Saddam's cousin Ali Hassan al-Majeed, widely known as "Chemical Ali," and 14 others on charges of crimes against humanity resumed on Monday.

Majeed, once one of the most feared men in Iraq, and the other defendants were charged for their role in crushing a Shi'ite uprising after the 1991 Gulf War. Prosecutors say up to 100,000 people were killed.

Majeed was sentenced to death earlier this year for masterminding a genocidal military campaign against Kurds in northern Iraq in 1998 that killed tens of thousands.

(Additional reporting by Aws Qusay in Baghdad)