An internal US State Department report says Blackwater Worldwide may lose its license to work in Iraq and recommends the agency prepare alternative ways to protect its diplomats there. The 42-page report by the State Department's inspector general says the department faces "numerous challenges" in dealing with the security situation in Iraq, including the prospect Blackwater may be barred from the country. The department would then have turn to other security arrangements to replace Blackwater, officials said. "The department faces the real possibility that one of its primary Worldwide Personal Protective Services contractors in Iraq - Blackwater (Worldwide) - will not receive a license to continue operating in Iraq," the recently completed report says. The report is labeled "sensitive but unclassified."