BAGHDAD, (Reuters) – Private security guards in Iraq, whose armoured convoys once barrelled through the streets with impunity, could face being thrown into crowded and violent Iraqi jails once their era of legal immunity ends on Jan. 1.

Under a security pact signed with the United States, foreign contractors, including some 30,000 armed-to-the-teeth private warriors, will become subject to trial in Iraqi courts. “We’re getting ready to enter a highly ambiguous period, and the risks are going to be high,” said Lawrence Peter, director of the Private Security Company Association of Iraq.

The prospect of being thrown in Iraqi prison is enough to frighten even the most seasoned of foreign guards, but industry officials say that, rather than charting an exit plan, they will take a wait-and-see approach.

Such guards have become a common sight in Iraq since the U.S.-led invasion in 2003 unleashed years of sectarian bloodshed in which horrifed Iraqis saw bodies piled on the streets daily. But the guards, who flooded into Iraq to protect diplomats and dignitaries from kidnappers and bomb attacks, evoke strong feelings among many Iraqis who have come to resent what they see as a disregard from some security firms for local lives.

This week, U.S. officials are expected to launch criminal charges against guards from U.S. firm Blackwater over the shooting deaths of 17 Iraqis in a Baghdad square last year.

While Blackwater denies wrongdoing, the incident ignited deep outcry in Iraq, leading U.S. officials to tighten controls on guards and firms to tone down their tactics.

Sitting at his desk in Baghdad’s fortified Green Zone, Peter shrugs off a mortar siren piercing a sunny winter afternoon and explains that “working in Iraq is not for the faint of heart.” “This is going to be a matter of building trust and confidence on both sides.” The new exposure to prosecution in Iraq comes about as part of a U.S.-Iraqi security pact which requires the 146,000 U.S. troops in Iraq to leave by the end of 2011.

U.S. officials appeared to yield fairly early on contractor immunity in lengthy, bare-knuckled negotiations on the pact. Under the new framework, U.S. soldiers are shielded from Iraqi law except for crimes committed off-duty and off-base.

More than the loss of immunity itself, security and other contractors are concerned by the prospect of long pretrial detentions and famously macabre conditions at Iraqi prisons. “The U.S. government doesn’t even want the military’s own employees in the Iraqi judicial system, but they think it’s okay to put the contractors there. That’s problematic,” said Doug Brooks, head of the International Peace Operations Association. “It would certainly make life more difficult being subject to Iraqi law and systems which are still immature at best, at worst corrupt,” said one firm official who declined to be named.

The significance of the change is one by-product of the unprecedented U.S. reliance on contractors in Iraq, who guard diplomats, serve food, sweep floors and much more.

At best, contractors are a ‘force multiplier’ that enable a smaller U.S. military to work overseas. At worst, they have clashed with the U.S. military’s efforts to win “hearts and minds” in Iraq.

The role of security contractors may grow as Washington reduces its troop numbers and as foreign businesses — so Baghdad hopes — open operations in the still-violent country. “The days of expats with guns and trucks is going to reduce … Iraqis won’t tolerate it,” the security firm official said.

Kyle Anne Lang, a spokeswoman for Triple Canopy, best known for employing thousands of Peruvians who guard checkpoints in the Green Zone, said the new rules won’t change much. “Really we’ve always done business in a manner which would not put us in trouble in the first place,” she said. But others said the new regime will make it more difficult to attract Western employees and to insure operations. “Most companies have notified employees that essentially the risk has gone up. They have to make a decision,” Brooks said.

Where possible, firms may try to replace foreign guards with Iraqis. Industry officials say the wait-and-see attitude may change quickly if Iraq deals with any alleged contractor infractions in what they see as a cavalier fashion.