It is the first time a foreigner has been killed in the Palestinian territory after being kidnapped.
The Salafist extremists had posted a video of Vittorio Arrigoni on YouTube, tied up and blindfolded.
They had threatened to kill him by 5pm on Friday, if Hamas did not release a number of Palestinian prisoners including one of the group's leaders.
But a spokesman for the Islamist movement Hamas, which controls the Gaza Strip, said: "The Italian was killed by suffocation and his body was found in a street of the city of Gaza."
