Prime Minister David Cameron convened an emergency meeting of his intelligence chiefs on Thursday after two Islamists hacked a soldier to death with meat cleavers on a south London street.
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One of the attackers was British-born and of Nigerian descent, a source with knowledge of the investigation said. The other man may also be British with a Nigerian background, the source told Reuters.
British media identified one of the men as Michael Adebolajo, citing police sources
British police on Thursday confirmed that the victim was a serving soldier. Scotland Yard said his family had asked not to publish his identity at this stage. Police also said they had carried out searches in the eastern county of Lincolnshire overnight in connection with the investigation into Wednesday's attack..
A dramatic clip filmed by an onlooker just minutes after Wednesday's killing showed a man with hands covered in blood shouting Islamic slogans and promising revenge on Britain for its participation in wars in the Muslim world.
"We swear by almighty Allah we will never stop fighting you. The only reason we have done this is because Muslims are dying every day," the black man in his 20s or 30s, wearing a wool jacket and jeans and speaking with a local accent, shouted in the footage obtained by Britain's ITV news channel.
"This British soldier is an eye for an eye, a tooth for a tooth."
The attack, just a month after the bomb attacks on the Boston Marathon and the first apparent Islamist killing in London since suicide bombers struck in July 2005, revived fears of so-called "lone wolves" who might have had no direct contact with Al-Qaida.
Chilling images of a blood-soaked killer urging Britons to overthrow their government or risk having their children face a fate similar to the dead soldier lying just yards away were splashed across the front pages of newspapers.
Police shot the two suspects while trying to arrest them, and the wounded men were taken into custody.
"I apologize that women had to witness that, but in our lands our women have to see the same thing. You people will never be safe. Remove your government. They don't care about you," the man said in the video before crossing the street and speaking casually to the other attacker.
Cameron chaired an emergency national security meeting with the chiefs of Britain's intelligence agencies and top officials after cutting short a visit to France to return to London.
"The police are urgently seeking the full facts about this case but there are strong indications that it is a terrorist incident," Cameron said before cutting short talks with French President Francois Hollande to return home.
"We have had these sorts of attacks before in our country and we never buckle in the face of them," he said.
A key question is whether the men acted alone or were part of a larger group.
The attack happened on the edge of London's sprawling Royal Artillery Barracks in Woolwich, a south London working class district which has long-standing historic links to the military.
In signs of a backlash after the attack, more than 100 angry supporters of the English Defence League, a far-right street protest group, took to the streets on Wednesday, some wearing balaclavas and carrying England's red and white flag. They were contained by riot police.
Separately, two men were arrested in connection with separate attacks on mosques outside London. No one was hurt.
Help for heroes
The victim was wearing a T-shirt saying "Help for Heroes", the name of a charity formed to help wounded British veterans. Britain has had troops deployed in Afghanistan since 2001 and had troops in Iraq from 2003-2009.
Before he was stabbed to death, the victim was knocked over by a blue car which then rammed into a lamppost. The attackers pounced on him in broad daylight in a busy residential street.
Witnesses said they shouted "God is greatest" in Arabic while stabbing the victim and trying to behead him.
"I am afraid it is overwhelmingly likely now to be a terrorist attack, the kind the city has seen before," London mayor Boris Johnson said. Police said in a statement that the murder investigation was led by the Counter Terrorism Command, a specialist branch within the London force.
Some onlookers rushed to help the victim and one woman tried to engage one of the attackers in conversation to calm him.
"He had what looked like butcher's tools - a little axe, to cut the bones, and two large knives. He said: 'Move off the body,'" Ingrid Loyau-Kennett was quoted by local media as saying.
"He said: 'I killed him because he killed Muslims and I am fed up with people killing Muslims in Afghanistan.'"
Police also found what appeared to be a rusty revolver.
Fred Oyat, a 44-year-old local resident, said he witnessed the attack on the soldier from the window of his high-rise apartment overlooking the scene.
"The victim was white," he told Reuters. "I was in my house when four shots rang out. I went to the window I saw a man lying on the ground with a lot of blood."
London was last hit by a serious militant attack in July 2005, when four young Islamists set off suicide bombs on the public transport network, killing 52 people and wounding hundreds. A similar attempted attack 2 weeks later was thwarted.
British counter-terrorism chiefs have recently warned that radicalized individuals posed as great a risk as those who plotted attacks on the lines of the 2005 bombings.
The bombing attacks on the Boston Marathon last month, which U.S. authorities blame on two brothers, have raised the profile of the "lone wolf" threat in the West. A French-Algerian gunman killed three off-duty French soldiers and four Jewish civilians on a rampage in southern France last year.
Britain's involvement in the wars in Afghanistan and Iraq in the past decade has often stirred anger among British Muslims and occasionally made soldiers a target at home. British police have foiled at least two major plots in which Islamist suspects were accused of planning to kill members of the military.
Ahmed Jama, a 26-year-old Woolwich resident, laid flowers at the scene as a sign of respect to the families involved.
"This has nothing to do with Islam, this has nothing to do with our religion. This has nothing to do with Allah," he said "It has nothing to do with Islam. It's heartbreaking, it's heartbreaking."