Knife-wielding attackers interrupted a French church service, forced the priest to his knees and slit his throat on Tuesday.
One of the assailants was a known would-be jihadist under supposedly tight surveillance, Reuters reports.
As the attackers came out of the church shouting “Allahu akbar” (“God is Greatest”) they were shot and killed by police.
The men arrived during morning mass in Saint-Etienne-du-Rouvray, a working-class town near Rouen, northwest of Paris, where the 85-year-old parish priest, Father Jacques Hamel, was leading prayers.
“They forced him to his knees and he tried to defend himself and that’s when the drama began,” Sister Danielle, who escaped as the attackers slayed the priest, told RMC radio.
“They filmed themselves. It was like a sermon in Arabic around the altar,” the nun said.
Three other worshippers were held hostage until the assailants were killed, one of them was badly wounded during the attack.
News agency Amaq, which is affiliated with the Islamic State, said two of its “soldiers” had carried out the attack. Police said one person had been arrested.
France’s anti-terrorism prosecutor Francois Molins identified one of the attackers as 19-year-old Adel Kermiche, a local man who was known to intelligence services after his failed bids to reach Syria to wage jihad.
Kermiche first tried to travel to Syria in March 2015 but was arrested in Germany.
Upon his return to France he was placed under surveillance and barred from leaving his local area.
But less than two months later he slipped away and was intercepted in Turkey making his way towards Syria again.
He was sent back to France and detained until late March this year when he was released on bail.
He had to wear an electronic tag, surrender his passport and was only allowed to leave his parents home for a few hours a day.
The fact that he was still able to commit the attack will raise yet more questions over the intelligence services and legal procedures in a country still under a state of emergency.
It has been less than two weeks since a Tunisian plowed a truck into a crowd in the French Riviera city of Nice, killing 84 people, an attack claimed by Islamic State.
“In the face of this threat that has never been greater in France and Europe, the government is absolutely determined [to defeat] terrorism,” President Hollande said in a televised address.
The White House condemned the attack and commended the French police’s “quick and decisive response”.
One former school acquaintance remembered Kermiche as a normal teenager who became obsessed with hardline interpretations of the Koran after the attack on the satirical Charlie Hebdo magazine in January 2015 and would later urge his friends to “fight for our brothers”.
“He tried to indoctrinate us,” said the 18-year-old, who gave his name only as Redwan.
A horrified local resident, Cecile Lefebre, said: “I have no words. How do you arrive at this point, killing people in cold blood like this? It’s pure barbarity.”
Former president Nicolas Sarkozy, who is expected to enter a conservative primary for next year’s presidential election, accused the Socialist government of being soft.
“We must be merciless,” Sarkozy said in a statement to reporters.
“The legal quibbling, precautions and pretexts for insufficient action are not acceptable. I demand that the government implement without delay the proposals we presented months ago. There is no more time to be wasted.”
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