The video attributed the killing of Nick Berg to Abu Musab al-Zarqawi, who has emerged as a leading plotter of terrorist attacks on Americans and their allies in Iraq and elsewhere.
A title on the videotape said: "Sheik Abu Musab Zarqawi executes an American with his own hands and promises Bush more."
The killing of Berg was denounced by President Bush, whose spokesman said it showed "the true nature of the enemies of freedom," and by his Democratic rival for the presidency, Sen. John Kerry, who said "America stands together" against terrorists.
News of the beheading left senators at a hearing on the abuse of Iraqi prisoners "in a virtual state of shock," said Virginia Sen. John W. Warner. Some senators had earlier expressed the fear that photos of naked prisoners being humiliated by U.S. soldiers could spark retaliation against American hostages.
Family and friends described Berg as an adventurous small businessman who had started a company, Prometheus Methods Tower Service, for which he climbed radio towers in the Philadelphia area to make repairs and install lights.
He had a humanitarian streak and had traveled to Kenya and Ghana, where he purchased a $900 brick-making press for a village, his family told reporters.
His body was found Saturday near a highway overpass in the northern city of Mosul.
Berg had decided to abandon the search for work after being detained by Iraqi police late March 24 in Mosul. On March 30, FBI agents visited his parents, Michael and Suzanne Berg of West Chester, Pa., to tell them Nick Berg was jailed in Iraq and to establish the reason for his presence in that country.
But Berg continued to be held by decision of the U.S. military, possibly because of uncertainty about whether his identity had been stolen by someone else, his parents said in recent media interviews.
Berg's parents filed a federal lawsuit April 5 against Defense Secretary Donald H. Rumsfeld demanding their son's release. He was freed the next day, according to Alfred A. Gollatz, the attorney who handled the case.
"We could have gotten him out of there before the hostilities escalated," he told the radio station. "I still hold [Rumsfeld] responsible.
"But it goes further than Donald Rumsfeld. It's the whole Patriot Act. It's the whole feeling of this country right now that rights don't matter anymore because there are terrorists about."
In the video footage, posted on the Web site of the terrorist group Ansar al-Islam, Nick Berg, dressed in an orange jumpsuit and with his hands bound, sits on the floor in front of five men wearing head scarves and masks.
In a quiet voice, he introduces himself: "My name is Nick Berg. My father's name is Michael. My mother's name is Suzanne. I have a brother and sister, David and Sara. I live in ... Philadelphia."