The company's reputation is highly damaged from an incident in 2007 when Blackwater guards opened fire on civilians in Baghdad killing 17 people.
Acting State Department Spokesman Robert Wood told reporters he didn't know who will step in to protect the diplomats now that Blackwater is barred.
"Contingency plans are obviously being looked at," Wood said noting the Iraq Ministry of Interior informed the embassy in Baghdad on January 23 that Blackwater's application for an operating license was not going to be approved.
He emphasized the U.S. will comply with Iraqi law and not use Blackwater. "We're going to comply with the Iraqi decision. We have no choice but to do that. So we're just right now trying to formulate how we're going to go forward."
Wood added, "We haven't made a decision on how we're going to move forward yet."
When asked who is protecting the diplomats today, Wood said, "I'll have to see who's actually on the ground doing it. I'm just not sure at this point."
Wood said the State Department "will do everything necessary to make sure that our personnel are -- have the security that they need."
Two other contractors work in Iraq but Wood wouldn't confirm if one of the contractors would take over Blackwater's role. "That's a possibility, but we haven't made a decision on how we're going to go," Wood said.