A graphic video was circulated on various websites purportedly showing the beheading of the Egyptians in the city of Sirte along the Libyan coast. The footage, entitled "A Message with Blood to the Nation of the Cross" used advanced production techniques and victims were made to wear orange jumpsuits, both common features of previous IS videos.
The killings have been condemned by governments around the world, including the by U.S. and the U.K.. Italy went as far as to close its embassy in Libya, citing a "deteriorating situation", and further pressed its case for a United Nations mission. Bernardino Leon, the UN Special Representative to Libya, has so far failed to broker a lasting agreement between the warring factions.
One of the masked militants in the video, speaking in English fluently, reiterated the intention of the group to expand, saying it "will conquer Rome".
Read MoreObama seeks war authorization from Congress to fight Islamic State
"There is now increasing urgency in Arab and EU capitals on the need to do something to reverse the descent of order in Libya and the increasing dangers to the neighboring states," Angus Blair, founder of the Signet Institute, a Cairo-based think tank, told CNBC.
Libya has been embroiled in a civil war since the ousting of Muammar Gaddafi in 2011. The internationally-recognized government has fled the capital Tripoli, while oil production has fallen further to 325,000 barrels per day (bpd) in January, from 900,000 bpd in October.
Bernardino Leon, the UN Special Representative to Libya, has so far failed to broker a lasting agreement between the warring factions.
Meanwhile, Egypt's economy has shown nascent signs of recovery since the presidential elections last summer despite sporadic violence, and a major investment conference slated for early March is intended to entice more foreign capital.
"For the moment, I do not see any immediate adverse impact on Egypt's economy, although all investors may have to look at the potential changes to their forward risk calculations of operating in Egypt," Blair explained.