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A video has surfaced online and reportedly shows the beheading of the third international hostage by the Islamic State Group, after two US journalists taken hostage in Syria were shown murdered.
The Islamist group released a video, available on the website of private terrorism monitoring group SITE, purportedly showing a masked militant beheading Haines.
This third video ends with footage of Alan Henning, according to reports. Henning is believed to be an aid worker from the UK, and is named as the next in line to be killed.
British Prime Minister David Cameron has tweeted a response to the killing.
Attorney-General George Brandis says the death is an 'act of barbarity' and "evil" that shows why Australia is engaged in the international fight against the extremists.
"It just serves to demonstrate, not that it's really necessary for there to be more evidence, how barbaric and evil these people are," he told ABC television on Sunday.
"This is a problem for the world and that is why we in Australia are engaged. We need to be engaged.
"This terrorist entity, ISIL, is a fundamental threat to the Western world in particular."
Labor frontbencher Chris Bowen said the decision to raise Australia's terror alert level from medium to high on Friday was appropriate.
He played down claims Australian involvement in a coalition trying to curb IS fighters in Iraq would increase the domestic security threat.
"Terrorists will engage in terrorist activities for whatever reason they feel is driving them to do it," he told Sky News.
"We can't let that influence what decisions we take as a nation."
Extremists from the Islamic State (IS) group had threatened to kill 44-year-old David Haines, and his family had earlier made a plea for the group to reply said they have not received any reply from the group after repeated messages.
In a short statement released through Britain's Foreign and Commonwealth Office late on Friday, the family said: "We are asking those holding David to make contact with us."
Islamic State militants had previously beheaded two American journalists and posted video evidence online. At the end of the second video, they threatened to kill Haines next and briefly showed him on camera.
Haines was abducted in Syria in 2013 while working for an international aid agency.
The British government had managed to keep his kidnapping secret out of concern for his safety until the most recent IS video identified him as a captive.
The Foreign Office said in a statement that the extremists had put Haines' name in the public domain.