French prosecutors say one person has been detained over the Normandy attack
A Catholic priest was forced to kneel by two men armed with knives before they slit his throat, according to a nun who witnessed the deadly attack.
The killers of 85-year-old Father Jacques Hamel also filmed the murder at the church in Normandy.
Another person is in a critical condition in hospital following the hour-long siege, which started after the knifemen stormed the parish church in Saint-Etienne-du-Rouvray, near Rouen, during morning mass.
They took hostage Father Hamel, two nuns and two parishioners.
The pair were "neutralised" by police as they came out of the church reportedly shouting "Allahu Akbar".
Describing the murder, the nun, identified as Sister Danielle, told French TV: "They forced him to his knees. He wanted to defend himself. And that's when the tragedy happened.
"They recorded themselves. They did a sort of sermon around the altar, in Arabic. It's a horror."
She said her dead colleague: "He was a great priest."
The identities of the attackers are unclear however Islamic State claimed two of its "soldiers" carried out the deadly assault.
Anti-terror chiefs have been appointed to take charge of the investigation and have arrested one person in connection with the attack.
French President Francois Hollande, visiting the scene, said the attackers claimed to be members of the terror group and slammed what he described as a "vile terrorist attack".
He said IS has "declared war on us, and we must fight this war by all means possible".
A spokesman for the French Ministry of the Interior, Pierre Henri Brandet, confirmed the priest was dead and said another hostage was "between life and death".
Mr Brandet told French TV channel BFMTV: "The two hostage-takers came out of the church armed and it was at that point that they were neutralised by the police."
He added a bomb disposal team and special forces were searching the church and its surroundings for possible explosives.
Pope Francis expressed his "pain and horror", and said he was appalled by the "barbaric killing".
French journalist Anne-Elisabeth Moutet said the assailants reportedly shouted "Allahu Akbar" on the steps of the building.
TV footage of the sealed-off crime scene showed one person being stretchered into an ambulance.
The other three hostages were brought out alive.
Le Figaro reported one of the hostages managed to escape during the hours-long ordeal and raised the alarm.
Emergency services were quickly on the scene and negotiators were summoned to talk to the hostage-takers.
The French newspaper also reported that the church targeted in Tuesday's attack was one of several Catholic sites on the hit-list of a 24-year-old Algerian student.
Sid Ahled Ghlam was arrested last year on suspicion of murdering a mother-of-one during a botched attempt to attack a church in Villejuif.
The identities of the attackers and their motive is unknown.
Anti-terror chiefs have been appointed to take charge of the investigation.
French Prime Minister Manuel Valls condemned what he described as "a barbaric attack on a church".
In Ireland, the Minister for Foreign Affairs Charlie Flanagan issued a statement condemning the attack "in the strongest possible terms".
"I want to convey our condolences to the French Government and the people of France, who have yet again been targeted by those who have no regard for human life and no respect for the freedoms we all hold so dear."
He also said his thoughts were with the family of the murder victim and all those affected by the incident.
The attack comes almost two weeks after the Bastille Day massacre in Nice which left 84 people dead after Tunisian Mohamed Lahouaiej Bouhel drove a truck into a crowd celebrating the Frenchnational holiday.
France has been under a state of emergency since the terror attacks in Paris in November last year.