The investigation "indicates a terrorist motive in Yassin Salhi's act, even though it is justified by personal considerations," said Paris chief prosecutor Francois Molins.
The 35-year-old, long known to security services for his radical views, was arrested Friday after an attack in which he rammed his gas-filled delivery van into a warehouse containing dangerous chemicals, causing an explosion.
Firefighters alerted by the blast found him trying to open gas bottles inside the Air Products factory, shouting "Allahu Akbar (God is greatest), before making the grisly discovery of the severed head of Salhi's 54-year-old boss Herve Cornara.
The prosecutor said that Salhi claimed to have strangled his boss "with one hand" before stopping 500 metres before the factory to decapitate him with a knife with a 25 cm blade.
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The head was attached to the fence with a chain and surrounded by two Islamic flags which Salhi said he had bought the night before the attack.
"This corresponds very precisely to the orders of Daesh (the Islamic State group) which calls regularly for acts of terrorism on French soil and in particular to cut the throats of unbelievers.
Salhi, who refused to talk for his first 24 hours in custody, later gave scattered testimony, claiming he was suffering from amnesia and had no memory of the macabre staging of the severed head.
He also claimed he didn't recall sending two photos of the crime to a French jihadist in Syria, including a selfie with the head, and a picture of the body draped in the Islamic flags with the head posed on the torso.
The suspect claimed his motives were "purely personal and his act was not terrorist," said Molins, adding that Salhi had blamed a fight with his employer as well as a dispute with his wife for pushing him to commit the crime.
During a raid on those close to Yunis, who is from Besancon in eastern France, police uncovered a telephone used to contact him in which he said in a Whatsapp conversation on the day of the attack that he indeed knew Yassin and was "one of the reasons he did that", referring to the crime.