Edgar Fritz Raupach was killed by his captors as Nigerian security forces conducted a raid early Thursday in the northern city of Kano, according to the security sources.
Residents reported hearing explosions and gunfire rock the neighbourhood of Danbare for more than half an hour at around 6:00 am, and said it appeared several hundred soldiers were involved along with trucks and armoured vehicles.
"The German kidnapped in January has been killed by his abductors early this morning," a military official told AFP on condition of anonymity.
"Following intelligence reports, men of [a military task force] raided a hideout where he was being held by his abductors."
A shootout occurred and the abductors also detonated explosives, said the official.
"They were subdued, but realising that it was the end for them, they killed the hostage," the official added.
Another military source and a police source confirmed Raupach's death. He was said to have been shot and stabbed by his captors.
The sources also said a number of the abductors had been killed in the raid, with differing accounts putting the figure between two and five.
The engineer was kidnapped on the outskirts of Kano in January in the days after a series of bombings and shootings claimed by Islamist group Boko Haram, which killed at least 185 people in the city.
Al-Qaeda in the Islamic Maghreb (AQIM) said in March it was holding the German and that it wanted to swap him for Filiz Gelowicz, the jailed wife of Fritz Gelowicz, the leader of a Sauerland-based group of Islamists. He is serving 12 years in prison for a bomb attack, while she is serving two-and-a-half.
They released a video which showed Raupach flanked by two armed men, begging for his life.
Speaking first in German and then English, he asks the German government to do something. “I beg my government to save my life,” he said. “My life is in your hands now, I beg you, or these people will kill me here.”
AQIM has not been known to operate directly in Nigeria, though Islamist group Boko Haram and other extremists in the country are believed to have links to the group.
In late March, Nigerian authorities said they had detained five men, including a Mauritanian, believed to be linked to Al-Qaeda's north African branch, over Raupach's kidnapping.
His death marks the second such incident in recent months in Africa's most populous nation and largest oil producer.
In March, security forces faced criticism after a failed bid to rescue an Italian and a British hostage.
Their captors killed them before Nigerian forces could rescue them in a joint operation with British security forces.
Germany had confirmed one of its nationals was kidnapped in northern Nigeria, and the German construction company Bilfinger Berger has said he was one of their employees.
Police in Kano had said the German man was attached to Nigerian construction firm Dantata and Sawoe.
In the fresh kidnapping that emerged on Thursday, Italian building and civil engineering firm Borini Prono confirmed that one of their employees had been abducted on Monday, but would not release further details.
Unidentified armed men were said to have snatched the engineer as he inspected road-draining works in the city of Ilorin.