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Islamic State, a militant group which has overrun large areas of Syria and Iraq, released a video this week of Sotloff being beheaded, calling the execution retaliation for US air strikes. His Israeli dual nationality was made public after the White House authenticated the footage.
Sotloff, who was Jewish, immigrated in 2005 to Israel. Its government became aware "at an early stage" of his captivity that he was Israeli, Foreign Minister Avigdor Lieberman said.
"The censors issued a gag order against reporting that he was an Israeli citizen. We are also in close touch with the United States on this entire matter, both ISIS (Islamic State) and the journalist Sotloff," he told Israel's Channel 10 TV.
Israel's military censors are empowered to preemptively block media stories deemed harmful to national security.
Prime Minister Benjamin Netanyahu, facing foreign calls to advance stalled peacemaking with the Palestinians after Israel's seven-week Gaza war against Islamist Hamas, cast Sotloff as an example of liberal Western values shared by the Jewish state.
Offering condolences to Sotloff's family during a speech in honour of an Israeli police counter-terrorism unit, Netanyahu said: "Steven was murdered because he represented, for these murderous terrorists, a symbol of the West - that same culture that radical Islam wants to eradicate."
He added: "I think there is the beginning of a certain realisation, with many in the world understanding better than in the past that the threats against Israel are the same as the threats against them."
Lieberman sidestepped a question on whether Israel had tried to rescue Sotloff, saying only that "there have been attempts, both American and European, to free hostages. To my regret these attempts did not succeed".
Under Israeli law, citizens who travel to enemy states such as Syria with second passports are subject to prosecution on their return. If they fall captive, the Israeli government is not required to take action for their repatriation, experts say.
"I know of no protocol whereby Israel is compelled to get involved in such instances," said Boaz Ganor, head of the International Institute for Counter-Terrorism at IDC Herzliya, a college near Tel Aviv where 31-year-old Sotloff had studied.
Ganor noted, however, that there could be case-by-case exceptions such as Israel's 2004 release of Arab security prisoners in exchange for Elhanan Tenenbaum, a retired Israeli army colonel who was abducted by Lebanese Hezbollah guerrillas while on an illegal trip to Dubai. The bodies of three Israeli soldiers killed by Hezbollah were also recovered in that deal.
A senior Israeli official briefed on intelligence affairs told Reuters he had no knowledge of any effort by the government to rescue Sotloff, who was kidnapped in Syria in August 2013.
"But I do know that he shouldn't have gone to such places," said the official, who spoke on condition of anonymity.
Sotloff had contributed stories to several Israeli media outlets, who said they had sought to suppress their connection to him, and his Jewish identity, while he was held hostage.
Israel on Wednesday officially outlawed Islamic State in what local television station Channel 2 said was a response to Western intelligence reports that several Palestinians from the occupied West Bank and the Gaza Strip had joined the group.
Lieberman said some among Israel's 20-percent Arab minority had also shown solidarity with Islamic State.
"ISIS in not an immediate military threat on Israel, but there is no doubt that the ISIS ideology is spreading, and this is no less a dangerous matter. To my regret we have already seen identification with ISIS and ISIS flags, both within the State of Israel, in Arab Nazareth and in other places," he said.