Two bodies feared hostage in Iraq in 2007 are feared dead after bodies were handed to British officials in Iraq.
Mr Miliband said forensic tests were being carried out on the remains to see if they were of two of the five Britons who were captured in Iraq in May 2007.
He said his thoughts were with the families of the men and "they will fear the worst for their loved ones".
There had been speculation earlier this year a deal to free the men was close.
'Distressing development'
IT consultant Peter Moore, from Lincoln, and four security guards were captured by armed militants at the Ministry of Finance in Baghdad in 2007.
Their captors are a group called the Islamic Shiite Resistance in Iraq.
Security experts understood there had been positive diplomatic moves behind the scenes to free them, including the release of a prisoner whose freedom was being demanded by the hostage-takers.
Three other captives still missing were in "grave danger", the Foreign Secretary said.
David Miliband said the remains passed to them by Iraqi authorities had yet to be formally identified, but the hostages' families will "fear the worst".
"If any proof was needed of the grave danger that those hostages face, it is the appalling news that has come through," he said.
Mr Miliband said: "This is a very distressing development.
"We have never speculated on the outcome of this case although we have been working intensively on it, so the overriding feeling today is one of deep sadness and fear."
He said forensic examinations are under way to establish the identities of the bodies and how they died.
"Our immediate thoughts are clearly with the families of the five Britons taken hostage in Baghdad in May 2007," he said.
"As would be the case with any development of this kind, they will fear the worst for their loved ones.
"This is terrible moment of uncertainty and fear for them."
Joe Gavaghan, a spokesman for the security company GardaWorld which employed the four guards, said families were not giving up hope.
He said: "The announcement is very concerning. We are certainly not giving up hope that Peter and our four security people are still alive."
"The threat to all those taken hostage in Iraq remains very high indeed."
The Britons, computer instructor Peter Moore and his four bodyguards, were seized by a Shi'ite militant group from inside an Iraqi finance ministry building in Baghdad in May 2007.
Britain was a key ally of the United States in the invasion of Iraq in 2003, but has now withdrawn all but about 500 troops from the country.
Sky News' foreign affairs editor Tim Marshall said: "It was my understanding that two bodies were handed to the Iraqi government last night (Friday).
Mr Miliband called for the immediate safe release of the remaining hostages.
He said he believed those involved in trying to gain the release of the two people whose remains had been handed over had "failed".
"I think British people understand why no British government makes concessions in return for hostage-taking," he added.
"Hostage-taking is never justified in any cause.
"Today's terrible news underlines the gravity of the crimes associated with it," Mr Miliband said.
He also praised the help the Iraqi authorities had given in attempts to free the Britons.
"I urge those working for peace and progress in Iraq to redouble their efforts to secure the release of all the hostages held there."
Little is known about the identities of the men because of a media blackout during a large period of their captivity.
The blackout originally came came on the instruction of the hostage-takers who said they did not want publicity.
The militants have released videos of the captives, including one - broadcast on Dubai-based TV station Al-Arabiya - warning that a hostage would be killed unless British troops withdrew from Iraq.
Mr Moore had been working for American management consultancy Bearingpoint when he was kidnapped, while the other men were contractors employed to guard him.
Their names of the four security guards are understood to be Jason, Alan, Jason and Alec.
Little else is known about them, other than that the guard Alan was from Dumbarton in Scotland.
"They immediately informed the British because they had been told these are British hostages.
"But it is my understanding, the bodies are several months old, that they died - however they died - several months ago, so they will have to be identified by DNA."
Mr Miliband said the government was "working intensively" towards securing the release of the hostages
Several videos of the hostages have surfaced since they were kidnapped.
In March, Britain's Channel 4 News television said a video showed a healthy-looking Mr Moore.
In February 2008, another video featuring Mr Moore was aired by Dubai-based al Arabiya television in which he called on Prime Minister Gordon Brown to free nine Iraqis in return for their freedom.
A third video, released in December 2007, showed another of the captives who identified himself as Jason saying the kidnappers would kill one of the five unless the UK withdrew its troops from Iraq.
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