(Warning: The first video contains distressing images)
Mr Cameron described the frenzied machete attack in Woolwich on Wednesday afternoon as "truly shocking", adding there were "strong indications that it is a terrorist incident".
Two men have been arrested in connection with the murder.
It is understood the victim was a serving soldier, thought to be in his early 20s, who was wearing a Help for Heroes t-shirt when he was killed.
Some eyewitnesses reported that attempts were made to behead him.
An eyewitness named James fought back tears as he told LBC radio what he saw happen.
"They were hacking at this poor guy, literally. They were hacking at him, chopping him, cutting him. These two guys were crazed," he said.
"They dragged him from the pavement and dumped his body in the middle of the road."
The eyewitness added that, afterwards, the two attackers stood around waving knives and a gun - even asking people nearby to take pictures of them "as if they wanted to be on TV or something".
ITV News later broadcast exclusive footage of a man with bloodied hands and carrying knives.
The man spoke into a camera held by an eyewitness, saying: "We swear by almighty Allah we will never stop fighting you."
He added: "I apologise that women have had to witness this today, but in our land our women have to see the same. You people will never be safe. Remove your government, they don't care about you."
He was then seen walking towards the victim, who was lying in the street, as another man stood over the body. A crashed vehicle was nearby.
The scene of the attack has been sealed off, and officers from the counter-terrorist unit are leading the investigation.
Security was also stepped up at military barracks across London.
We have had these sorts of attacks before in our country and we never buckle in the face of them.
"Tonight, our thoughts should be with the victim, with their family, with their friends," the Prime Minister said.
"People across Britain, people in every community, I believe, will utterly condemn this attack."
Mr Cameron was speaking at a Paris press conference with French president Francois Hollande on Wednesday evening.
He confirmed he would cut short the visit to return to the UK to chair a meeting of the Government's Cobra emergency committee in the morning.
"I have been briefed by the Home Secretary about this absolutely sickening attack," he said.
"It is the most appalling crime. We are obviously seeking, and the police are urgently seeking the full facts about this case, but there are strong indications that it is a terrorist incident."
Earlier Metropolitan Police Commander Simon Letchford asked people "to remain calm, and avoid unnecessary speculation".
He confirmed that the two alleged attackers were shot by armed officers at the scene. One of the men is understood to be in a serious condition.
"They were taken to separate London hospitals," he said.
"I can understand that this incident will cause community concerns and I would like to reiterate that we are investigating what has taken place today."
There will continue to be an increased police presence in this area, and the surrounding areas this evening. That presence will continue as long as is needed.
Metropolitan Police Commander Simon Letchford
A nearby school was put into lockdown as armed police responded to the incident, which happened about 200 yards from the Royal Artillery Barracks before 2.30pm.
A number of the King's Troop Royal Horse Artillery and independent companies of the Grenadier and Coldstream Guards are housed at the barracks, adjacent to Woolwich Common.
Mr Cameron declined to confirm that the victim was a serving soldier.
He added: "We will look at every aspect of security, we will look at every aspect of what you can learn from these incidents.
"But we also have to remember that in a free country like ours, the best way to defeat terrorism is to make sure that you continue to go about your life, to live your life and show that terrorists can never win, and that's important."
Labour leader Ed Miliband, who cut short a visit to Germany to return to the UK, said: "This is a truly appalling murder which will shock the entire country.
"All of my thoughts are with the family and friends of the victim.
"The British people will be horrified by what has happened in Woolwich. They will be united in believing that this terror on our streets cannot be allowed to stand.
"The Labour Party will offer the Government our complete support in establishing the facts of what happened and ensuring that those responsible face the full force of British justice."
Help for Heroes, the charity whose t-shirt witnesses said the victim was wearing, expressed their sadness.
"Help for Heroes is appalled to hear that a man, believed to be a serving soldier, has been brutally murdered in Woolwich today.
"We are desperately saddened to hear of this sickening attack and offer our thoughts and prayers to his family, colleagues and friends."
Meanwhile, on Wednesday evening, supporters of the English Defence League (EDL) gathered at Woolwich Arsenal train station near the scene and threw bottles at police. It was reported that around 250 men took part in the demonstration.
Elsewhere, two men have been arrested after separate attacks on mosques in England.
A 43-year-old man is in custody on suspicion of attempted arson after reportedly walking into a mosque with a knife in Braintree, Essex at 7.15pm.
Police in Kent were called to reports of criminal damage at a mosque in Canterbury Street, Gillingham, at 8.40pm.
A spokesman said a man is in custody on suspicion of racially-aggravated criminal damage.