David Cameron has said Britain will not pay a ransom for a UK hostage who Islamic State extremists are threatening to kill.
The Prime Minister told Sky News it was a "desperately difficult situation", but insisted it was the right policy as the money would be used to fuel terrorism.
He was critical of other Western countries which paid ransoms, describing it as "deeply regrettable".
Mr Cameron also repeated his warning the terror group posed a direct threat to the UK, and stressed the need to "squeeze it out of existence".
The PM was speaking as world leaders met at Newport in Wales for the two-day Nato summit where the crises in Iraq and Ukraine will dominate talks.
Two US journalists have been murdered by IS jihadists, who are now threatening the life of a British hostage.
Mr Cameron said: "It's a desperately difficult situation."
But he added: "We don't pay ransoms to terrorists when they kidnap our citizens.
"On other occasions, payments have been made and sometimes I think governments have turned a blind eye and I think that is deeply regrettable.
"From the intelligence and other information I have seen, there is no doubt this money helps to fuel the crisis that we see in Iraq and Syria."
Mr Cameron said Britain was offering support to the moderate Syrian opposition and to the Iraqi government to help them in their battle against IS in both countries.
"This is an organisation which is a direct threat to our country.
"The world would be a safer place if we could squeeze this organisation out of existence."
But asked whether the UK was ready to work with Syrian president Bashar Assad to take on the militant group, Mr Cameron said: "I think President Assad is part of the problem, not part of the solution."
Nato Secretary General Anders Fogh Rasmussen said: "I do believe the international community as a whole has an obligation to stop the Islamic State from advancing further."
While there had been no request for Nato involvement, if one was made by Iraq, Mr Rasmussen said it would be considered seriously, pointing out the alliance had assisted in the past.
The continuing conflict in Ukraine will also be discussed at the summit.
The 28 Nato leaders have agreed to meet Ukrainian President Petro Poroshenko to hear what support his country wants. It is also a symbolic sign of solidarity which will not be lost on the Kremlin.
Nato is under pressure to harden its response to Russian incursions into Ukraine.
Plans for a new Rapid Reaction Force will be finalised. It will number around 4,000 troops, on notice to deploy within 48 hours.
Logistic and planning teams will be stationed in Poland and the Baltic States along with key equipment to speed up any deployment.
Mr Rasmussen said: "We are still witnessing Russian involvement in destabilising the situation in eastern Ukraine."
He urged Moscow to draw back its forces from the Ukrainian border and withdraw support from the separatist rebels.
Ahead of the summit, the US President Barack Obama and Mr Cameron visited a local primary school.
Mr Obama greeted the pupils in Welsh saying "bore da" - "good morning" - and then listened to a welcome message, thanking him for being the first serving US president to visit Wales.
The Nato summit is the first to be held in the UK since the collapse of the Soviet Union - the last time the alliance met in Britain was in London in 1990.
It was meant to mark the end of combat operations in Afghanistan, but this has been overshadowed by events in Ukraine, Syria and Iraq.