An insurgent group linked to al-Qaeda claimed it had slit the throats of the soldiers, who disappeared during an attack on Friday night.
"Coalition forces have recovered what we believe are the remains of our soldiers, who disappeared in the vicinity of Yusifiyah," US-led coalition forces spokesman Major General William Caldwell told reporters.
"Their remains have been transported to a coalition base today and will be transported to the US for a positive DNA verification and for an autopsy to see how they died."
The US military said it killed 15 "terrorists" during overnight raids in farmland near Baquba, north-east of the capital.
But Iraqi police, witnesses and a human rights activist disputed the US claim.
They said the victims were all poultry farm workers who had been sleeping in the fields of Bushaheen village in an area known as Al-Salam (peace), about 90 kilometres from Baghdad.
Soldiers missing
Kristian Menchaca, 23, and Thomas Tucker, 25, went missing on Friday night after they came under attack at a traffic control point near Yusifiyah, an insurgent-stronghold along the Euphrates River.
One soldier was killed in the attack.
The US military launched a massive hunt for the pair involving nearly 8,000 troops.
General Caldwell said one US soldier was killed and 12 others wounded during the search operation.
He refused to say whether Mr Menchaca and Mr Tucker had been brutally tortured as indicated earlier by General Abdul Aziz Mohammed of the Iraqi Defence Ministry.
"The two US soldiers were found in the Yusifiyah area near the power station and unfortunately their bodies show that they had been tortured and then killed viciously," the general told a news conference.
In an internet message, the Mujahedeen Shura Council, an al-Qaeda in Iraq-led insurgent coalition, said it had executed the two soldiers.
"We announce good news to the Islamic nation from the battlefield ... The two crusaders taken hostage have been executed by having their throats cut," the message on an Islamist site said.
The statement also paid tribute to "Emir Abu Hamza al-Muhajer (new head of al-Qaeda in Iraq) for having the decision of the sharia (Islamic law) tribunal implemented" against the two US soldiers.
The group had claimed the abduction yesterday.
The latest fatalities bring the US military death toll in Iraq since the March 2003 invasion to 2,503, according to an AFP count based on Pentagon figures.
General Caldwell also said during the search operation coalition forces killed the "right-hand man" of slain al-Qaeda in Iraq leader Abu Musab al-Zarqawi.
Iraqi Mansur Suleiman al-Mashhadani was killed on Friday by US forces not far from where the two soldiers were abducted, General Caldwell said.
He described him as Zarqawi's right-hand man and a liaison between al-Qaeda and tribes in the restive area south of Baghdad.
Dispute over farmland deaths
In the raids near Baquba, the US military said its troops came under small arms fire from the rooftop of a house when they arrived at their target, and fought back.
US forces then cleared homes in the area detaining "three terrorists" who were "found hiding amidst nine women".
Al-Qaeda's leader in Iraq, Abu Musab al-Zarqawi, was killed in a June 7 US air strike on his safe house in the same area north of Baghdad.
The main hospital in Baquba said it received 13 bodies from Bushaheen, most of them killed by gunshots to the head and abdomen. It also admitted four wounded people.
At the village, an AFP correspondent saw 13 graves that had been dug to bury the dead as shocked and grief-stricken relatives mourned.
Hussam Shamel said he, his three brothers and father were sleeping in the fields with other workers because of the summer heat and fears of theft from the chicken pens when US troops descended on the area.
"I hid and saw them shoot my brother Wissam after he started running," Mr Shamel said.
He said a second brother, Hisham, was also killed in the raid while his father and a third brother were missing.
Mr Shamel and other witnesses said no one in the fields shot at US soldiers.
Pools of blood and shreds of clothing could still be seen at the scene.
Witnesses said that a total of nine people were killed in the fields while four others died when soldiers stormed into surrounding homes.
Iraqi police and Hadi al-Azzawi of a human rights organisation in Baquba backed the version of the story given by the villagers adding that 10 people were also detained in the US operation.
Since the start of the year, there have been many allegations that US troops killed Iraqi civilians with the most serious involving claims that US marines went on a rampage at Haditha in western Iraq on November 19, killing 24 civilians after a marine was killed by a roadside bomb.