The killings, which have shocked many in the predominantly Christian country, were condemned by Pope Francis and U.N. Secretary General Ban Ki-moon.
The victims were planning to go to Europe by boat from Libya but were captured and then killed by the Islamic extremists, said grieving family members and government officials. Ethiopia's government on Monday declared three days of mourning.
Pope Francis on Monday sent a letter to the patriarch of Ethiopian Tewahedo Orthodox Church, Abuna Matthias, expressing "distress and sadness" at the "further shocking violence perpetrated against innocent Christians in Libya.
The pope has been very vocal in condemning the persecution of Christians across the globe in recent months, and stressed in the letter to the Ethiopian orthodox patriarch that "it makes no difference whether the victims are Catholic, Copt, Orthodox or Protestant."
U.N. Secretary-General Ban Ki-moon condemned the killings and "utterly deplores the targeting of people on the basis of their religious affiliation," his spokesman said.
Some people gathered Monday gathered in an Addis Ababa slum to mourn two former residents whose faces were recognized in the Islamic State video. The 29-minute video, released on Sunday via social media accounts and websites used by the extremists, shows many Ethiopian Christians held captive in Libya being shot or beheaded by militants.
Eyasu Yikunoamlak and Balcha Belete left Ethiopia two months ago with the aim of reaching Europe. They are believed to have left Ethiopia through Sudan and later traveled to Libya where they planned to take a boat to Europe but they were seized by Islamic State militants, relatives told The Associated Press on Monday.
Relatives and friends of the two victims in Cherkos Village, a poor neighborhood of the Ethiopian capital, said Eyasu and Balcha grew up together and used to live in the same house.
Seyoum Yikunoamlak, the older brother of Eyasu, said he first learned about the death of his younger brother on Sunday evening while checking the news on Facebook.
"I was very worried how to tell our family but everyone is a Facebook user these days so people in our village told our family that Eyasu was among the group that are on the (Islamic State) video," a tearful Seyoum said.
Family members stopped getting calls from Eyasu a month ago and grew worried, but news of a violent death was never expected, he said.
"His dream was to go to Italy and then reach the U.K. and help himself and his family members," he said.
Redwan Hussein, an Ethiopian government spokesman, said on Sunday he believed the victims were Ethiopian migrants trying to reach Europe, an account bolstered by local residents who said impoverished young men are tempted to make the perilous journey to Europe.
"There is no job opportunity here. I will try my luck too, but not through Libya," said Meshesa Mitiku, a longtime friend of the two victims. "I want to move out. There is no chance to improve yourself here. This is the whole community's opinion."
Ethiopia's three days of mourning start Tuesday, when lawmakers will meet to discuss the killings and consider the country's possible response, the government said in a statement.