WorldCom, which supplies telecommunications services, including voice, data, wireless, video and Web hosting services to about 75 federal agencies, is estimated to have received about $331m (£201m) from the federal government.
Government officials said it has not had problems with WorldCom since the company filed for bankruptcy this summer. WorldCom's service performance "has been consistent with the terms of the contract" since its bankruptcy filing.
The contract, which is with WorldCom operating unit MCI WorldCom Communications, was originally awarded in January 1999. This renewal is the first of four one-year options available under the initial contract, and it means that WorldCom will continue to provide its services until at least January 2004.
The federal government had been under pressure from some groups to suspend service with WorldCom for overstating its earnings by some $4bn (£2.5bn). Earlier this year, Enron and Arthur Andersen were suspended from government business.
Typically, companies are suspended from government business after indictments. But in WorldCom's case, the government has limited its action to individuals facing criminal sanctions. Former WorldCom officials Scott Sullivan and David Myers have been suspended from conducting business with the federal government. Sullivan has been indicted on seven criminal counts, including securities fraud; Myers has pleaded guilty to related charges.
Ray Bjorklund, an analyst at Federal Source, said it would have been difficult for the government to switch service providers midstream, and as long as a company meets its service commitment, "you can do business with companies in bankruptcy". A change might have also raised national and economic security issues.
Bjorklund said the government decision to renew the contract was a vote of confidence in the company that may help it in its dealings with the private sector.
Jerry Edgerton, senior vice-president of WorldCom Government Markets, said the renewal demonstrates "that WorldCom and WorldCom's ability to provide services of the highest quality remain rock solid".