David Miliband, the Foreign Secretary, described the news as a “distressing development” and said that the Government was trying to establish the identities of the dead men.
Foreign Office sources on Saturday night said, however, that the condition of the bodies appeared to suggest that the hostages had died several months ago.
The Foreign Secretary added that the Government had failed in trying to secure the safe release of the hostages but added that despite the deaths, Britain would never negotiate would the kidnappers.
He continued: “Our immediate thoughts are clearly with the families of the five Britons taken hostage in Baghdad in May 2007.
"As would be the case with any development of this kind, they will fear the worst for their loved ones. This is terrible moment of uncertainty and fear for them.
“Hostage-taking is never justified in any cause. Today’s terrible news underlines the gravity of the crimes associated with it.”
Mr Miliband reiterated Britain’s call for the immediate safe release of “all the remaining hostages”.
He added: “I also confirm that we are working intensively towards that goal but I also have to say the threat to them remains very high indeed.”
Computer expert Peter Moore and his four private security guards, whose names have never officially been released, were kidnapped at the Iraqi Finance Ministry in Baghdad in May 2007 by heavily armed men in police uniforms.
The men, who were sized in an audacious raid involving up to 40 insurgents, were taken to Sadr City, a notorious Shia slum in eastern Baghdad where they were paraded by their captors.
Within hours of the abduction, the kidnappers demanded the release of nine Shia militiamen held by the Americans.
The Foreign Secretary added that he was grateful for the Iraqi government’s efforts to secure the release of the hostages.
“I urge those working for peace and progress in Iraq to redouble their efforts to secure the release of all the hostages held there," he said.
"I think today the hearts of every person in this country will go out to the families of the hostages. They and their loved ones are at the forefront of our thoughts and actions.”
Asked how surprised he was by the news, Mr Miliband said: “This is a very distressing development.
"We have never speculated on the outcome of this case although we have been working intensively on it, so the overriding feeling today is one of deep sadness and fear.”
Iraq became infamous as a hunting ground for foreigners at the height of the insurgency, led by Sunni Islamist al-Qaeda, after the 2003 invasion.
Names such as those of Kenneth Bigley and Margaret Hassan became synonymous with the terrifying threat of kidnap and execution by al-Qaeda-associated groups.
Mr Bigley, a British civil engineer, was abducted and beheaded in October 2004. Mrs Hassan, a British-Irish aid worker, was seized weeks later and shot dead.
The British government has said it fears that two bodies handed back by the Iraqi authorities are those of two Britons captured in 2007. Foreign Secretary David Miliband said that forensic tests were currently being conducted to determine whether they were indeed those of the hostages.

In May 2007, four security guards and an IT consultant, Peter Moore, were kidnapped at the Ministry of Finance by armed militants of the Islamic Shiite resistance. The kidnappers released a video of the captives, saying that one will be killed if British forces do not withdraw from Iraq.


Miliband said that "we have never speculated on the outcome of this case although we have been working intensively on it, so the overriding feeling today is one of deep sadness and fear. Our immediate thoughts are clearly with the families of the five Britons taken hostage in Baghdad in May 2007."

Foreign Office sources have suggested that the bodies have been dead for several months.