President Obama said the "prayers of the American people are with the family of devoted and courageous journalist Steven Sotloff".
The President said US intelligence had confirmed Mr Sotloff was killed in "an horrific act of violence" by Islamic State.
"We cannot even begin to imagine the agony of everyone who loves Steven is feeling right now," he said at a press conference in Estonia.
"Today our country grieves with them."
I've been told at the Nato summit that the intelligence services know exactly who 'Jihadi John' is - or at least are 99.9% certain.
The British aid worker being held by Islamic State is David Haines, a 44-year-old father-of-two from Perth, Scotland.
In a video statement which claims to record his final words US hostage and journalist Steven Sotloff blames US foreign policy for his death.