A poor quality videotape on Tuesday showed five masked men sawing off the head of the bound hostage, dressed in orange Guantanamo Bay style overalls, after pushing him off a white plastic chair in a bare room.
"My name is Nick Berg, my father's name is Michael … I have a brother and sister, David and Sarah," said the bound man, adding he was from Philadelphia.
ِِA body found on Monday by US military patrol along a roadside over the weekend was identified as Berg's.
One of the masked men read a statement saying the killing was revenge against abuse and humiliation of Iraqi prisoners carried out by US guards at Baghdad's Abu Ghraib prison.
"For the mothers and wives of American soldiers, we tell you that we offered the US administration to exchange this hostage with some of the detainees in Abu Ghraib and they refused," the statement said.
"So we tell you that the dignity of the Muslim men and women in Abu Ghraib and others is not redeemed except by blood and souls. You will not receive anything from us but coffins after coffins … slaughtered in this way," the men said.
The video showed the five men shouting "God is greatest" as one of them cut off 26-year-old Berg's head, drowning his screams.
The killing resembled the murder of US reporter Daniel Pearl, beheaded by Islamists in Pakistan who claimed he was a spy.
The website said Abu Musab al-Zarqawi, a top ally of al-Qaida leader Usama bin Ladin, was the man who cut off Berg's head. The statement in the video was signed off with Zarqawi's name and dated 11 May.
"The dignity of the Muslim men and women in Abu Ghraib and others is not redeemed except by blood and souls"
Message for occupation force on Islamist website
The White House reacted angrily to the video of the killing, saying the killers would not be spared.
"This shows the true nature of the enemies of freedom," White House spokesman Scott McClellan said. "We will pursue those responsible and bring them to justice."
US State Department officials said Berg was a private citizen not associated with a military contract.
Berg had been missing for several weeks. He was last heard from on 9 April when he telephoned his parents. He said he was trying to find a safe way home after failing to find work as an independent communications contractor.
The grieving parents of Berg had complained their son could have been alive if he had not been held for nearly two weeks by Iraqi police and said they were angry at the lack of information from the US government about his detention.
Berg had been detained without charge by Iraqi police from 24 March to 6 April, after being stopped at a checkpoint in Mosul.
His parents felt he would have returned home had he not been detained. He planned to return home by March-end, but his plans went haywire after his detention.
His daily communications with his parents stopped on 24 March. His father, Nick, filed a lawsuit on 5 April stating Berg was being held illegally by the US military in Iraq. The next day Berg was released.
Berg's body is in Kuwait. It will be flown to Germany and then to Dover Air Force Base in Delaware.