Prime Minister David Cameron says ministers are now "actively" considering whether to supply arms to the Kurdish militias fighting IS in northern Iraq or to provide them with military training.
So far Britain has only supplied non-lethal equipment such as helmets and body armour to help the Kurds in their fight with IS militants.
Speaking to the Today programme David Cameron also stressed the need for a fully-inclusive government in Iraq.
He said: "The most important thing we need is a government in Baghdad that represents all of the Iraqi people. We must make sure that the help we give is in concert with those on the ground rather than ignoring that they are there or going over their heads."
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.