The New York Times quotes current and ex-government officials as saying Blackwater helped the CIA with planning, training and surveillance.
Several million dollars were spent on the programme but no militants were caught or captured, the report says.
Blackwater staff were used to guard US government personnel in Iraq from 2003.
But they were accused of using excessive force on a number of occasions, including the killing of 17 civilians in Baghdad in 2007.
The North Carolina-based firm - which has not had its licence to operate in Iraq renewed - has since been re-named Xe.
Although some controversial work, including the interrogation of prisoners, has been outsourced in recent years, the fact that outsiders were used in a programme with "lethal authority" raised concerns about accountability in covert operations, officials were quoted as saying.
The House of Representatives' intelligence committee is investigating whether the CIA broke the law by not informing Congress about the programme for eight years.
Democratic Senator Dianne Feinstein, chairwoman of the Senate intelligence committee, said last month that Mr Panetta told Congress former Vice-President Dick Cheney was behind the secrecy.
But some Republicans accuse the Democrats of trying to make political capital from the situation.
"I think there was a little more drama and intrigue than was warranted," Representative Peter Hoekstra, the most senior Republican on the House intelligence committee, told the Times.
