(Adds British investigation)
* Video purports to show beheading of U.S. journalist
* Islamic State threatens the life of a second American reporter
* Killing said to be revenge for U.S. air strikes in Iraq
By Alexander Dziadosz and Michael Georgy
BAGHDAD, Aug 20 (Reuters) - Islamic State militants posted a video that purported to show the beheading of American journalist James Foley in revenge for U.S. air strikes in Iraq, prompting widespread revulsion that could push Western powers into further action against the group.
The video, titled "A Message To America," also showed images of another U.S. journalist, Steven Sotloff, whose life Islamic State said depended on how the United States acts in Iraq.
The gruesome video presented President Barack Obama with bleak options that could define America's involvement in Iraq and the public reaction to it, potentially dragging him further into a conflict he built much of his presidency on ending.
British anti-terrorist police began an investigation into the video, in which Foley's killer spoke with a London accent.
Apparently a British national, the killer is just one of hundreds of European Muslims drawn to join Islamic State in Iraq and Syria and who authorities say pose a security threat to U.S. and European interests if they return from the Middle East.
The video showed a high level of technical proficiency and the use of a British voice may have been intended to make its contents clear to audiences in the United States, Islamic State's declared enemy.
Obama held back from making a public statement about the beheading until the video could be formally authenticated. The FBI believes the video is genuine, according to GlobalPost, a Boston online publication for which Foley had worked.
"If genuine, we are appalled by the brutal murder of an innocent American journalist and we express our deepest condolences to his family and friends," White House National Security Council spokeswoman Caitlin Hayden said in a statement.
Other political leaders were swift to react.
British Prime Minister David Cameron interrupted his holiday to return to London to lead the hunt to identify the killer.
Foreign Secretary Philip Hammond said he was not surprised to hear the British accent and that large numbers of British nationals were fighting in Iraq and Syria.
INTELLIGENCE SERVICES
"Our intelligence services will be looking very carefully on both sides of the Atlantic at this video to establish its authenticity, to try to identify the individual concerned and then we will work together to try to locate him," Hammond told Sky news.
France said it wanted the permanent members of the U.N. Security Council and regional countries, including Arab states and Iran, to coordinate action against Islamic State.
President Francois Hollande called for an international conference to discuss how to tackle the group.
Iraqi Foreign Minister Hoshiyar Zebari urged the world to back his country against Islamic State, which he described as a threat to the world, not just to the minority ethnic groups whose members it has killed in Iraq.
Germany and Italy said they were ready to send arms to bolster the military capabilities of Iraqi Kurds fighting Islamic State in northern Iraq.
Sending arms into conflict zones is a major departure for Germany, which has often shied away from direct involvement in military conflicts since World War Two due to its Nazi past.
The video's message was unambiguous, warning of greater retaliation to come against Americans following nearly two weeks of U.S. air strikes that have pounded militant positions and halted the advance of Islamic State, which until this month had captured a third of Iraq with little resistance.
Foley, 40, was kidnapped on Nov. 22, 2012, in northern Syria, according to GlobalPost. He had earlier been kidnapped and released in Libya.
Sotloff, who appeared at the end of the video, went missing in northern Syria while reporting in July 2013. He has written for TIME among other news organisations.
On Facebook, Foley's mother Diane Foley said: "We have never been prouder of our son Jim. He gave his life trying to expose the world to the suffering of the Syrian people.
"We implore the kidnappers to spare the lives of the remaining hostages. Like Jim, they are innocents. They have no control over American government policy in Iraq, Syria or anywhere in the world."
The video was posted after the United States resumed air strikes in Iraq this month for the first time since the end of the U.S. occupation in 2011.
ISLAMIC STATE
Islamic State, which has declared a caliphate in the parts of Iraq and Syria it controls, opened the video with a clip of Obama saying he had authorised strikes in Iraq.
The words "Obama authorizes military operations against the Islamic State effectively placing America upon a slippery slope towards a new war front against Muslims" appeared in English and Arabic on the screen.
It showed black and white aerial footage of air strikes with text saying "American aggression against the Islamic State".
A man identified as Foley, his head shaven and dressed in an orange outfit similar to uniforms worn by prisoners at the U.S. military detention camp in Guantánamo Bay, is seen kneeling in the desert next to a man standing, holding a knife and clad head to toe in black.
"I call on my friends, family and loved ones to rise up against my real killers, the U.S. government, for what will happen to me is only a result of their complacency and criminality," the kneeling man says.
The man next to him, in a black mask, speaks in a British accent and says, "This is James Wright Foley, an American citizen, of your country. As a government, you have been at the forefront of the aggression towards the Islamic State."
ISLAMIC ARMY
"Today your military air force is attacking us daily in Iraq. Your strikes have caused casualties amongst Muslims. You are no longer fighting an insurgency. We are an Islamic army, and a state that has been accepted by a large number of Muslims worldwide."
Following his statement he beheads the kneeling man. At the end of the video, words on the side of the screen say, "Steven Joel Sotloff", as another prisoner in an orange jumpsuit is shown on screen. "The life of this American citizen, Obama, depends on your next decision," the masked man says.
University of Virginia political scholar Larry Sabato said the killing was like the beheading of American journalist Daniel Pearl in Pakistan in 2002. He said it could help bolster a perception among Americans that the United States will have to be more aggressive in dealing with Islamic State militants.
Syria has been the most dangerous country for journalists for more than two years. At least 69 other journalists have been killed covering the conflict there and more than 80 journalists have been kidnapped in Syria.
The U.S.-based Committee to Protect Journalists estimates that approximately 20 journalists are currently missing in Syria. Many of them are believed to be held by Islamic State.
Islamic State also released a video on Tuesday that gave a strong indication it might try to strike American targets. The video with the theme "breaking of the American cross" boasts Islamic State will emerge victorious over "crusader" America.
It followed a video on Monday warning of attacks on American targets if Washington strikes against its fighters in Iraq and Syria.
As well as taking territory, Islamic State has seized a number of oil wells in northern Iraq. The government in Baghdad said it was troubled by reports that Islamic State was smuggling oil to export markets and warned the purchase of such supplies could help the group fund its operations.
(Additional reporting by Steve Holland in Edgartown, Mass., Stephanie Nebehay in Geneva, Oliver Holmes and Tom Perry in Beirut, Sabine Siebold in Berlin, Costas Pitas and William James in London, and John Irish in Paris; Writing by Giles Elgood; editing by David Stamp)
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