A soldier saw the hostages emerging tens of metres from Israeli forces on Friday in Shejaiya, an area of intense combat in northern Gaza where Hamas militants operate in civilian attire and use deception tactics, the official said.
"They're all without shirts and they have a stick with a white cloth on it. The soldier feels threatened and opens fire. He declares that they're terrorists. They (the Israeli forces) open fire. Two (hostages) are killed immediately," the official told reporters in a phone briefing on Saturday.
The third hostage was wounded and retreated into a nearby building where he called for help in Hebrew, the official said.
"Immediately the battalion commander issues a ceasefire order, but again there's another burst of fire towards the third figure and he also dies," the official said.
"This was against our rules of engagement," he added.
The military on Friday identified the three hostages killed in Shejaiya, an eastern suburb of Gaza City, as Yotam Haim and Alon Shamriz, abducted from Kibbutz Kfar Aza, and Samer Al-Talalka, abducted from nearby Kibbutz Nir Am.
Hamas militants rampaged through Israeli towns killing 1200 people and capturing 240 hostages on October 7. Israel then launched a counter-attack, during which Gaza health authorities say close to 19,000 people have been confirmed killed.
Around 300 people turned out to mourn Al-Talalka, 25, at his funeral on Saturday in his hometown of Hura, in southern Israel.
"We had so many hopes, expectations, that he would come back to us," his cousin, Alaa Al-Talalka told Israel's public broadcaster Kan from his Bedouin community's mourning tent.
"We're not going to start pointing fingers, who is guilty and who is not. It is just not the time," Al-Talalka said.
"The families are thinking only of how to bring the hostages back alive. This is the time to ask for the war to end."
More than 100 hostages remain in Gaza, held incommunicado despite Israeli calls for Red Cross access.
More than 100 women, children, teens and foreigners were released in a deal struck in late November. Others have been declared dead by Israeli authorities.
The news on Friday that three had been killed by Israeli forces prompted a late-night protest outside Israel's defence headquarters in Tel Aviv, where hostage families were expected to deliver a statement later on Saturday.
One father said each day left families guessing whether they will be next to receive bad news.
"We're in a kind of Russian roulette," Ruby Chen, whose son Itay is captive in Gaza, told reporters as he held up an hour glass.
"Israel's government needs to get a grip and bring back the hostages."
