The U.S. government is investigating whether private military contractor Blackwater USA, blamed for the deaths of 11 Iraqis in Baghdad on Sunday, has been shipping unlicensed automatic weapons and military goods to Iraq.

Two former Blackwater employees have pleaded guilty in Greenville to weapons charges and are cooperating with federal officials investigating Blackwater, based in the tiny town of Moyock in North Carolina's northeastern corner.

Blackwater, which guards the U.S. ambassador and other State Department personnel in Iraq, had its license to operate in Iraq suspended this week after Sunday's shooting at a busy Baghdad intersection. Prime Minister Nouri al-Maliki has said he favors barring the company permanently, calling the shooting "cold-blooded."

The case has been forwarded to a magistrate to determine whether criminal charges should be filed, an Interior Ministry spokesman said Friday.

Blackwater has said that the contractors were fired upon and were returning fire.

The State Department relies on Blackwater to protect its employees. The company deploys about 1,000 contractors as bodyguards for the U.S. ambassador and other diplomats in Iraq.

Blackwater declined a request for an interview Friday.

But this morning, Blackwater issued a statement about the weapons investigation. It reads: "Allegations that Blackwater was in any way associated or complicit in unlawful arms activities are baseless. The company has no knowledge of any employee improperly exporting weapons. When it was uncovered internally that two employees were stealing from the company, Blackwater immediately fired them and invited the ATF to conduct a thorough investigation. The employees, who were former marines and law enforcement, have been convicted and are currently negotiating sentencing in Raleigh with federal prosecutors."

"This issue is completely unrelated to Blackwater U.S. Government programs in Iraq."

The investigation into Blackwater's weapons is noteworthy because Congress and the Iraqi government have criticized the company and accused it of acting with impunity. One of its contractors, for example, shot and killed an Iraqi vice president's security guard on Christmas Eve in Baghdad. Blackwater sent the man back to the United States and fired him. He has not been charged in the U.S. or Iraq.

Two sources familiar with the investigation said that prosecutors are looking at whether Blackwater lacked permits for dozens of automatic weapons used at its training grounds in Moyock. The investigation is also looking into whether Blackwater was shipping weapons, night-vision scopes, armor, gun kits and other military goods to Iraq without the required permits.

U.S. law demands close attention to who ships weapons -- and to whom they are shipped. The weapons-smuggling investigation was mentioned in a letter sent Tuesday to State Department Inspector General Howard Krongard by Rep. Henry Waxman, a California Democrat who for years has been investigating wrongdoing by private contractors in Iraq.

Waxman charged that Krongard, the State Department's top watchdog, was impeding the investigation "into whether a large private security contractor working for the State Department was illegally smuggling weapons into Iraq."

When Krongard heard about the investigation, he sent an e-mail message ordering his investigative staff to stop work until the federal prosecutors in North Carolina could brief him. Krongard delayed the briefing for weeks, Waxman said.

Krongard did not assign an investigator to the case, but rather a member of his congressional and media staff, Waxman wrote.

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