British paratroops work with the UN in Sierra Leone
A long-awaited consultation paper says "reputable" private firms may be able to do a better, more cost-effective job than forces like the United Nations.
Quizzed on the issue at Prime Minister's Questions, Tony Blair said: "I think what the foreign secretary is saying, rather, is that the use of mercenaries has to come within some proper system of regulation.
"Up until now that has not been the case and that is why it is important that we make sure there are proper rules in the use of mercenaries."
Labour backbencher Andrew Mackinlay has called the proposals "repugnant".
But Conservative Foreign Affairs spokesman Michael Ancram said his party supported the use of mercenaries "so long as they are properly accredited".
Although he added: "There should be no question of mercenaries becoming a substitute for properly-recruited and equipped British armed forces."
For the Liberal Democrats Menzies Campbell said that the case for regulating companies providing military services was "overwhelming".
Although he said he had concerns that the UN could contract peacekeeping operations to the private sector which he said raised questions about "issues of allegiance and the chain of command".
The Green Paper was prompted by the Arms-to-Africa affair four years ago, which led to claims that the UK Government had connived with the British private military company - Sandline International - in the illegal export of arms to Sierra Leone.
The Foreign Office is emphasising that it is a consultation document, putting forward options for discussion and not specific policy proposals.
But it says that given the way the world is changing, the business of providing private military services is likely to grow.
Therefore, a licensing system may be desirable to try to distinguish between different private military companies.
It says that in Africa private companies often have greater respect for human rights than government forces do.
'Offensive'
And they may to do a better, more cost-effective job than the United Nations peacekeeping force in Sierra Leone (UNAMSIL), which costs $600m (£420m) a year.
In the foreword Mr Straw says: "Today's world is a far cry from the 1960s when private military activity usually meant mercenaries of the rather unsavoury kind involved in post-colonial or neo-colonial conflicts."
The paper adds that the use of private military companies raises important concerns about human rights, sovereignty and accountability.
The document is likely to lead to a heated political debate as some MPs want no use of private companies at all.
Mr Mackinlay, a member of the Commons foreign affairs select committee, said it was "breathtaking in the extreme" that Mr Straw would "even contemplate giving such companies a veneer of respectability".
He said the foreign affairs committee, and other MPs who had been calling for the Green Paper, had expected it to herald legislation outlawing either recruitment of mercenaries in the UK or companies organising arms sales to mercenary companies.
Better regulation
"At the very least, we expected much tighter controls," he added.
Colonel Tim Spicer, the former Sandline head who now runs Strategic Consulting International, said private military companies would never be a substitute for forces like the British Army.
"But there are certain circumstances where the quick deployment of a private military company is going to save lives and stabilise the situation," he said.