In message comprising two still images, the purported Iraqi group - identifying itself as the Islamic Army in Iraq - said Baldoni had been executed because their demands had not been met.
"The group calling itself the Islamic Army in Iraq said they executed the Italian journalist Enzo Baldoni because Italy did not respond to their demand to withdraw troops from Iraq within 48 hours," Aljazeera reported.
Aljazeera decided not to broadcast the images.
Baldoni, 56, disappeared last week on the road to Najaf, the scene of fierce fighting between US troops and the al-Mahdi Army of Shia leader Muqtada al-Sadr.
The Islamic Army in Iraq on Tuesday said it was holding Baldoni and threatened to kill him if Italy did not withdraw its 3000 troops from Iraq within 48 hours.
The Italian government initially rejected the demand, saying it would maintain its "civil and military" presence in Iraq, but early on Thursday Rome said it was prepared to pull its soldiers out if the interim government in Baghdad requested it.
Italian Prime Minister Silvio Berlusconi described the killing as an "act of barbarity".
"There are no words for an inhuman act which at one swoop wipes out centuries of civilisation and returns us to the dark times of barbarism," Berlusconi said in a message of condolences to the family of the 56-year-old journalist, who was married with two children.
Besides being a reporter for Italian newspapers, Baldoni was volunteering for the Red Cross while in Iraq.
“He was trying to save human lives in Najaf by helping a Red Cross convoy in a spirit of solidarity which has always underscored his thinking and his actions,” Baldoni’s daughter Gabriella said on Wednesday.
Four other Italians have been captured in Iraq since April by groups seeking to force US allies leave the country.
One of them, civilian security guard Fabrizio Quattrocchi was shot and killed. Three others were released unharmed.