Blackwater Worldwide, the private security firm accused of killing 17 civilians in Baghdad, is seeking a financial backer after talks with Cerberus Capital fell through.

The North Carolina-based private army said that it needed financing to expand its operations and is thought to be looking for about $200 million (£100 million).

Blackwater has become the highest profile of the private security companies (PSCs) operating in Iraq after a number of fatal incidents involving its armed guards.

In 2004 four of its American contractors were captured in Fallujah and their bodies were mutilated before being hung from a bridge. This was the catalyst for an invasion of the city by US Marines.

Last year Blackwater's guards opened fire on a crowd in Nisoor Square, Baghdad, killing 17 people and injuring 24 more. The Iraqis claim that those killed were civilians and the incident is under investigation by the FBI.

Blackwater has started to look at ways to expand its business outside Iraq and is seeking financing to do so.

In a message to staff, Gary Jackson, the company's president, wrote: “We have had two successive quarters of unprecedented growth. We are exploring multiple avenues to finance our continued expansion.”

However, security industry sources have said that Blackwater is being forced to change direction because its lucrative Iraq business is in danger of drying up.

The US Department of State has paid Blackwater, a privately owned company, about $470 million a year since the start of the Iraq war to provide armed protection for its staff. After the Nisoor incident there were calls for the company to lose its government work but the State Department renewed the contract until next year.

Defence sources have said that whatever the outcome of the US presidential election Blackwater, run by Erik Prince, the Republican former Navy Seal, may find itself without friends in Washington.

Blackwater has advertised in security industry journals repositioning itself as a peacekeeping force. The adverts show mothers feeding babies and Blackwater guards smiling as children play in a street. It has also set up a division called Greystone, which is seeking to win protection work from the UN, aid organisations and foreign companies.

A defence industry source said: “Theirs is nearly all US government work and if that goes they are in trouble.”

Mr Prince is reported to have approached Cerberus, the private equity house that owns Smith & Wesson, the gun maker, seeking funding, but was turned down.

A number of PSCs are having to seek new business or new backers as the US and UK governments reduce troop numbers and spending in the Iraq. G4S, the former Group 4, is completing the takeover of ArmorGroup, the British PSC, and a number of other firms are rumoured to be looking for a buyer.

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