Feingold's letter also raises concerns about the admissibility in court of evidence not gathered by law enforcement personnel.
"The presence of contractors in the Force Investigation Unit could jeopardize this responsibility and undermine the perceived impartiality of the investigation unit," the letter says.
Feingold's office says it has not yet received a response from the State Department.
After the shooting in Nisoor Square, the State Department implemented a number of changes in convoy operating procedures, including the placement of cameras in all convoy vehicles to document potential incidents and a requirement that all department convoys in Iraq must be accompanied by a Diplomatic Security agent.
Feingold also calls into question the need to hire the contractors in the first place, pointing out that the State Department has received funding to hire an additional 100 Diplomatic Security personnel to meet the increased demand for agents in Iraq.
Peter Singer, an expert on private security contractors at the Brookings Institution, agreed with the federal regulation prohibiting contractors from conducting criminal investigations.
"The key question is not whether can a contractor do it, but rather should a contractor do it," Singer said. "There are some things that you outsource because it makes sense and it might yield better efficiency. But there are other functions that are inherently governmental, which you just can't outsource.
"From the perspective of governmental regulations now, overseeing investigations of a criminal law nature is an in-house job," he added. "Even more, from the perspective of common sense, it's a no-brainer. You don't have those outside the government as an investigating authority over potential crimes, particularly those in a war zone."
Despite numerous allegations of misconduct by some of the 20,000 contractors in Iraq, to date, none have been prosecuted.