By Ian Simpson

WASHINGTON (Reuters) - The Transportation Security Administration said Friday it is removing controversial full-body scanners at U.S. airports and replacing them with new scanners that allow greater privacy.

The TSA canceled a contract with Rapiscan, a unit of OSI Systems Inc, on Thursday because the company had failed to deliver software to protect the privacy of passengers.

The TSA had faced widespread complaints from travelers that the Rapiscan equipment, using an X-ray technology called backscatter, had shown what looks like a naked image of passengers' bodies to security officers.

David Castelveter, a TSA spokesman, said they would be largely replaced by a scanner made by L-3 Communications Holdings that uses so-called millimeter technology. The radio wave device creates a generic outline that highlights the body area where an anomaly is detected.

The TSA "is in the process of removing all the backscatter units from ... airports where they are deployed and will replace most of them with millimeter wave technology," he said.

The TSA has 174 Rapiscan scanners at about 30 airports.

Peter Kant, a Rapiscan executive vice president, said the scanners would be stored at the company's expense. They would still belong to the TSA and could be used by other U.S. government agencies, he said.

TSA had increasingly relied on the full-body scanners after a Nigerian man allegedly tried to detonate a bomb hidden in his underwear aboard a transatlantic flight in December 2009. The bomb set off a rush to upgrade security to detect explosives underneath clothing.

TSA had given Rapiscan until June 2013 to come up with a software upgrade to prevent the scanner from projecting the naked image. TSA said in statement that it would be unable to meet the deadline.

(Reporting by Ian Simpson; Editing by Cynthia Osterman)