Yotam Haim, 28, Samer Talalka, 22, and Alon Shamriz, 26 were killed in the Shejaiya neighbourhood of Gaza City on Friday.
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An Israeli official said the men had emerged shirtless from a building with one carrying a white flag on a stick.
They were tens of metres away but feeling threatened, an IDF soldier declared them “terrorists” and opened fire.
Two were killed immediately while the third returned to the building wounded.
After hearing a scream for help in Hebrew a commander ordered troops to cease fire before the hostage re-emerged.
He was then shot and killed.
Israeli authorities admitted that killing the trio as they held a white flag was a breach of “rules of engagement”.
When Israeli forces searched the building on Sunday they found “SOS” and “Help, 3 hostages” written in food on fabric.
It is not clear if the men – who had survived 70 days inside Gaza – had been abandoned by their captors or escaped.
The shootings triggered huge protests in Tel Aviv on Friday as thousands of demonstrators took to the streets.
They spilled red paint and screamed “deal, now!” as they demanded the Israeli government free hostages immediately.
The three men were among 240 kidnapped on October 7 when gunmen cut through the Gaza border fence and slaughtered 1,139 people.
Samer Talalka was reportedly toiling in a field in Southern Israel’s Kibbutz Nir Am when terrorists wounded him before taking him to Gaza.
Yotam Haim and Alon Shamriz were both abducted from Kibbutz Kfar Aza the same day.
Alon was laid to rest in Israel on Sunday, as thousands of mourners turned out to pay their respects.
In a eulogy, his brother Ido blamed the Israeli authorities for his kidnapping and death, adding: “I hope your death will command life.
“And they will realise the lives of our hostages are critical, and they have to act quickly to free everyone.”
IDF Chief of the General Staff Herzi Halevi told troops on Saturday the incident must never be repeated.
He said: “You see two people, they are with hands up and without shirts, take two seconds, and I want to tell you something just as important.
“And if it’s two Gazans with a white flag coming out to surrender why would we shoot at them? Absolutely not. Absolutely not. That’s not the IDF.”
More than 100 Israeli hostages remain in Gaza, held incommunicado despite Israeli calls for Red Cross access.
In a deal struck in late November, more than 100 women, children, teens and foreigners were released.
Other hostages have been declared dead by Israeli authorities.
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