Witnesses said the man was hacked to death with a machete-style knife in the Woolwich district in the southeast of the British capital on Wednesday.
ITV News network broadcast footage of an African man carrying a blooded machete in the aftermath of the attack, saying "we swear by almighty Allah, that we will never stop fighting you.
"I apologise that women had to witness this today but in our lands, our women have to see the same," he continued. "You people will never be safe. Remove your government, they don't care about you."
Media reports said the victim was a serving British soldier.
"It is the most appalling crime," Prime Minister David Cameron said, before cutting short a visit to Paris.
"The police are urgently seeking the full facts about this case but there are strong indications that it is a terrorist incident."
Home Secretary Theresa May was to chair a meeting with the government's emergency COBRA security committee on Wednesday night in response to the attack.
She said two men were shot by armed police and were receiving treatment for their injuries.
Al Jazeera's Laurence Lee, reported from the scene of the attack that witnesses said the victim had first been hit by a car and that two men came out of a car with a machete and a gun and started to chop the man into pieces.
Witnesses said the men had fearlessly approached police when they arrived and were then shot.
Britain's Ministry of Defence said it was urgently investigating reports that a serving soldier was involved in the incident.
Security was tightened in the area immediately after the incident. Helicopters hovered above and nearby roads were sealed off by the police.
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