"We, Al-Qaeda in Iraq, announce that the judgment of God has been implemented against the ambassador of the infidels, the ambassador of Egypt. Oh enemy of God, Ihab al-Sharif , this is your punishment in this life," says the statement posted by the group led by Abu Mus'ab al-Zarqawi.
The group posted a video showing the hostage speaking but did not show the actual killing.
Though the authenticity of the posting cannot be immediately verified, the group had earlier threatened to kill the diplomat.
Egyptian television reported that the family of the diplomat had confirmed it has been notified by Egyptian authorities of his death.
In its posting on the Internet, Al-Qaeda had included photos of identification cards belonging to al-Sharif and called him "the devil's ambassador."
Insurgents have reasons to be unhappy with Egypt as the country was to become the first Arab state to upgrade ties with Iraq and al-Sharif was to become Egypt's ambassador to Baghdad.
Yahia Said, a researcher on Iraq at the London School of Economics, says that would be the main motive for a killing.
"Egypt is leading [and] is encouraging Arab states to open legations in Baghdad. [The country] is encouraging other Arab states to open embassies in Baghdad and send ambassadors and that sort of would constitute a formal recognition of the new Iraq," Said said.
Many Arab countries withdrew their ambassadors from Iraq after Saddam Hussein invaded Kuwait in 1990.
Diplomats from Bahrain and Pakistan escaped ambushes on 5 July. Gunmen opened fire on the convoys of Pakistani Ambassador Mohammed Younis Khan and Bahrain's charge d'affaires, Hassan Malallah Ansari.
Meanwhile, in Jordan, 180 top Muslim experts and religious affairs yesterday issued a statement banning assassinations being carried out in the name of Islam and urging respect in the Muslim world for a diversity of opinions.
The stand was based on religious edicts issued by Sheikh Mohammed Sayed Tantawi of Cairo’s Al-Azhar university, the highest center of Sunni Muslim learning; by Ayatollah Ali Sistani, Iraq’s pre-eminent Shi'ite religious leader; and by other key religious leaders in Saudi Arabia, Turkey, and Jordan.
Alireza Nourizadeh is a London-based journalist and director of the Center for Iranian-Arab Studies. He has closely followed the conference in Jordan and says some leading Iraqi Sunni clerics close to the insurgency like Sheikh Ahmad al-Kubaisi were participating.
Nourizadeh says the condemnation of violence might have an effect on some insurgents in Iraq.
"The condemnation of violence and requesting all the Muslims, all the followers of Islam, to pursue a moderate policy in their dealing with political issues [might] perhaps help," Nourizadeh said.
However, Nourizadeh says some hard-core extremists like al-Zarqawi, the leader of an Al-Qaeda-affiliated group in Iraq, will not listen to what the conference says and will continue violent acts.
He says militants will always find clerics who would endorse their own extreme tactics as a kind of holy war against "infidels."