A spokeswoman said: "Foreign Office officials are in close contact with all the families."

The families of the other hostages spoke of the heartache.

Mr Moore’s father, Graeme, described the wait for confirmation as "torture" - but said his thoughts were now with the the family members of the four other hostages.

The 59-year-old delivery driver, from Leicestershire, added: "Today’s information brings very mixed feelings. Obviously, I hope my son is alive but I feel desperate for the other families.

"What they are going through is unimaginable."

The five contractors were seized on May 29, 2007, by about 40 armed men wearing police uniforms at the Iraqi Finance Ministry.

Captain Doug Beattie, who recently retired from service with the Royal Irish Regiment, said the bodies were a "signal" to the British Government and the security company which employed the two dead captives.

The evidence would suggest "deep, deep negotiations" are ongoing behind the scenes, Mr Beattie, who served in Iraq and was later decorated for bravery in Afghanistan, added. Mr Miliband described the developments as "distressing" and said the British authorities had worked with the Iraqi authorities with the hope that the men would be released alive and well.

"In this case we, all of us, have clearly failed to achieve that goal in respect of two bodies whose identities we cannot yet confirm," he said yesterday.

"It’s very important that we continue to work for the confirmation of those identities and finally for the benefit of the other hostages."

The Prime Minister was "saddened and dismayed" by the news, a Downing Street spokesman said.

Shadow foreign secretary William Hague said: "This is deeply sad and distressing news, in particular for the families who have been waiting so long to know what has happened to their loved ones.

"We must still not give up hope for some of the hostages, or relax the constant efforts to bring them home."

In February last year a video broadcast by Dubai-based TV station Al-Arabiya showed a bearded and tired-looking Mr Moore asking Gordon Brown to free nine Iraqis in exchange for the British hostages.

He said: "All I want is to leave this place. I tell Gordon Brown the matter is simple: release their prisoners so we can go."

Responsibility for the kidnapping was at first pinned on Muqtada al-Sadr’s Mahdi Army.

It was thought to be a retaliatory attack for the killing by British forces of the militia’s commander in Basra, southern Iraq, a week earlier.

The release of a leading Iraqi militant by US forces earlier this month had sparked fresh hopes that the kidnapped Britons could be freed.

The American military handed Shiite insurgent Laith al-Khazali over to the Iraqi authorities on June 6.

Al-Khazali is a senior member of Asaib Ahl al-Haq, or the League of the Righteous, which has been linked to the kidnapping.