But the bill, voted 389-30 in the House of Representatives, faces opposition from the Republican White House and a similar version still must make its way through the Senate before becoming law.
Lawmakers hope to clear up confusion and close loopholes over which laws apply if the more than 160,000 U.S. contractors working in Iraq are accused of committing crimes.
The bill expands the Military Extraterritorial Jurisdiction Act (MEJA), which covers defense department contractors, to all civilians working for the U.S. government abroad. Blackwater, which has about 1,000 staff in Iraq, has a State Department contract to protect its diplomats there.
"It will give our country the ability to hold contractors accountable, which will enhance our national security and the safety of our troops," said the bill's author, Democratic Rep. David Price of North Carolina, Blackwater's home state.
In addition, the bill would expand the MEJA so the Department of Justice, through the FBI, must enforce it by investigating and prosecuting offenses by contractors. The proposal would establish FBI units, where the incidents took place, to investigate every incident for which there is reasonable suspicion of criminal felony misconduct.
Democratic leaders in the Senate have indicated they are eager to move forward with similar legislation. Majority Leader Harry Reid, a Nevada Democrat, said this week he believed the law should be changed to close a loophole that apparently leaves some U.S. contractors immune from prosecution.
But it was unclear whether the Senate would work on a version authored by Democratic presidential hopeful Sen.
WHITE HOUSE CONCERNS
The White House said it supported greater accountability for contractors abroad, but had "grave concerns."
"The bill would have unintended and intolerable consequences for crucial and necessary national security activities and operations," the White House in a formal assessment of the bill released on Wednesday.
The measure would put "unwarranted burdens" on the defense department and obligate it to support criminal investigations by the FBI in the middle of a war, it added.
Price said the White House objections should "infuriate anyone who believes in the rule of law."
The September 16 Blackwater shooting incident in Baghdad has exposed the challenge of holding accountable contractors in Iraq, who perform a broad variety of tasks from laundry and cooking for troops to protecting diplomats.
If something goes awry -- from a domestic dispute to a shooting involving Iraqi civilians -- the legal repercussions are largely untested, say experts.
Further complicating the issue is the fact that under an agreement with the former occupying U.S. authority, Iraqi courts do not have the jurisdiction to prosecute contractors without U.S. government permission.
Peter Singer, an expert from the Brookings Institution who has done extensive research on the activities of contractors in Iraq, said more challenging than any legal question was whether there was a will to act against contractors anyway.
"You can have wonderful laws but they become irrelevant if no one executes them," said Singer.
(Additional reporting by Susan Cornwell)