Federal prosecutors are investigating whether staff from controversial US security company Blackwater smuggled weapons to Iraq, according to reports.
Blackwater provides security to US diplomatic staff in Baghdad
Some employees are alleged to have sent over unlicensed weapons and equipment, that could have been used by a group labelled as terrorist by the US.
The North Carolina-based firm said it was not aware of such an investigation.
But it confirmed two members of staff were sacked in August 2005 for stealing company property in the US.
Blackwater was blamed for a Baghdad gunfight in which 11 civilians died last Sunday.
The contractor had its licence to operate in Iraq withdrawn by the Iraqi authorities following the shootout, but resumed limited operations on Friday.
The News and Observer in North Carolina quoted two sources as saying officials were investigating whether any Blackwater staff had shipped weapons, night-vision scopes, armour, gun kits and other equipment to Iraq, without the required permits.
BLACKWATER USA FACTS
Founded in 1997 by a former US Navy Seal
Headquarters in North Carolina
One of at least 28 private security companies in Iraq
Employs 744 US citizens, 231 third-country nationals, and 12 Iraqis to protect US state department in Iraq
Provided protection for former CPA head Paul Bremer
Four employees killed by mob in Falluja in March 2004
The newspaper said that, in January, two former members of staff with the firm had pleaded guilty in Greenville, North Carolina, to weapons charges and the pair were now co-operating with federal investigators.
The allegations of weapons smuggling in Iraq by a North Carolina firm came to light earlier this week in a written statement from the state department's inspector general, Howard Krongard.
In July, Turkey complained to the US that they had seized American weapons from the outlawed Kurdistan Workers Party (PKK), designated a terrorist organisation by Washington.
Investigators are reportedly attempting to determine if any Blackwater weapons could have been sold on the black market and ended up in the hands of the PKK.
Meanwhile, the Iraqi government was also investigating if Blackwater had been involved in six other violent incidents in Iraq that left at least 10 people dead, according to the Washington Post's Saturday's edition.
An Iraqi interior ministry investigation found Blackwater to be "100% guilty" of last weekend's incident in which 11 Iraqi civilians were killed.
Blackwater insists its guards acted in self-defence.
A spokeswoman for the company said on Saturday that they had called in investigators from the Bureau of Alcohol, Tobacco and Firearms after finding two Blackwater employees stealing company property in August 2005.
The members of staff were dismissed and then criminally prosecuted in connection with offences in the US, said the spokeswoman.
Responding to allegations that Blackwater employees were the subject of an Iraq arms smuggling probe, the spokeswoman told the BBC News website: "We are aware of that report and we have yet to see definitive proof that the firm in question is Blackwater.
"I'm not saying it's not, as sometimes these things can happen, but it's a hazy situation."
Regarding Saturday's Washington Post report, Blackwater said it was based on one-sided information from the Iraqi Ministry of the Interior.