The South Korean foreign ministry verified a report on the pan-Arab Al-Jazeera station that Kim Sun-il, a 33-year-old man whose captors had threatened to behead him, was dead.
Al-Jazeera, which said it received a videotape showing that Kim had been beheaded, said the execution was carried out by the al-Qaida-linked group Monotheism and Jihad.
Mr Kim's body was found by the US military between Baghdad and Fallujah at 5.20pm local time (3.20pm GMT), said foreign ministry spokesman Shin Bong-kil.
"It breaks our heart that we have to announce this unfortunate news," he said.
The South Korean consul in Iraq and Kim Chun-ho, president of Gana General Trading the company that employed the victim, were travelling to the site 35km west of Baghdad to collect the remains, Mr Shin said. Gana is a supplier to the US military.
South Korea convened its National Security Council at 2am to discuss the government's reaction, he added.
The US military first identified the remains as an Asian man and notified the South Korean military in Iraq of the finding. Later, the South Korean embassy in Baghdad confirmed that the body was that of Mr Kim by checking a picture of the remains that it received by email, Mr Shin said.
Kim's kidnappers had threatened to kill him at sunset on Monday unless South Korea cancelled a troop deployment to Iraq. The Seoul government rejected the demand, proceeding with plans to dispatch 3,000 soldiers starting in August.
