Bernard Ghen Ted Fen, 39, an engineer was executed around 4pm Monday in Indanan town on Jolo Island, 1,000 kilometers south of Manila.
The militants are also believed to be holding captive two Canadians, a Norwegian, a Filipina, a Dutch man and an Italian priest in the jungles of Jolo.
Negotiations for Ted Fen’s release failed, prompting the military to launch air strikes on the area where Abu Sayyaf militants were believed to be hiding him.
The hostage was beheaded directly after the bombardment started and the Abu Sayyaf hastily dispersed during the shelling.
Troops have been dispatched to hunt down the militants and locate Ted Fen’s body, which was reportedly buried by his captors.
The beheading took place just hours after Malaysian Prime Minister Najib Razak landed in Manila for the two-day summit of the Asia-Pacific Economic Cooperation forum.
Ted Fen was abducted alongside Thien Nyuk Fun, 50, manager of the Ocean King Seafood Restaurant in Sandakan town, Sabah, on May 14 from the town of Sandakan. Thien was freed on November 9 after a ransom of 30 million pesos (around $638,000) was paid, according to an unnamed police source.
Police identified the leaders of the group behind the Sandakan abduction as Alhabsy Misaya, Alden Bagade and Angah Adji.
The Abu Sayyaf has been blamed for some of the deadliest terrorist attacks in the Philippines as well as high-profile kidnappings for ransom involving foreign hostages.