Justice Secretary Robert Buckland told MPs that the attack by Sudesh Amman in Streatham, less than two weeks after his release from prison, “makes the case plainly for immediate action”.
The emergency legislation will block the release of more than 200 terrorists who are set to be released over the next few months, and is likely to face a legal challenge.
Boris Johnson pledged to end automatic early release after Usman Khan, a convicted terrorist released from prison on license, stabbed Jack Merritt and Saskia Jones to death at Fishmongers’ Hall in London last year.
“Yesterday’s appalling incident makes the case plainly for immediate action,” Mr Buckland told MPs.
“We cannot have the situation, as we saw tragically in yesterday’s case, where an offender – a known risk to innocent members of the public – is released early by automatic process of law without any oversight by the Parole Board.
“We will be doing everything we can to protect the public, that is our primary duty.
“We will, therefore, introduce emergency legislation to ensure an end to terrorist offenders getting released automatically having served half of their sentence with no check or review.”
The Parole Board for England and Wales will have a veto over the early release of any terrorist offender, and no terrorist will be considered for release before they have served two-thirds of their sentence.
In Scotland, automatic early release was scrapped in 2015 for serious offenders jailed for more than four years.
Mr Buckland said the government faced “an unprecedented situation of severe gravity” and that the legislation to be introduced this week will apply to serving prisoners.
The Justice Secretary said the parole service would be “strengthened” to deal with the risk posed by convicted terrorists, following criticism of the government over budget cuts. He added: “We face a threat from an ideology that takes no heed for others and we must use every tool we can to make sure that that threat is neutralised.”
Speaking yesterday, Mr Johnson said: “I think the question that everybody has about the individual concerned is, what was he doing out on automatic early release, and why was there no system of scrutiny, no parole system, to check whether he was really a suitable candidate for automatic early release.
“And that is a very complex legal question. We do think it’s time to take action.
“I hope people understand that the anomaly we need to clear up is the process by which some people are still coming out under automatic early release without any kind of scrutiny or parole system.”
Earlier, the independent reviewer of terrorism legislation warned that an attempt to retrospectively end early release for those already in prison could face a legal challenge.
“I would expect there would be a big legal battle about it, but it is not impossible,” said Jonathan Hall, the current independent reviewer of terrorism legislation.
He added: “The difficulty is that you are only – for this cadre of offenders with short sentences – delaying the point at which they are going to be released.”
Amman, 20, was shot dead by police after stabbing two people in Streatham High Road, a short distance from the bail hostel where he lived and which was being searched by detectives yesterday.
He was under active surveillance by armed counter-terrorism officers after being released in January following a 2018 conviction for disseminating terrorist material. Amman had served half of his 40-month sentence, making him eligible for automatic early release.
Before his conviction, he had written of his “desire to be a martyr” and chatted online about planning knife and bomb attacks. Amman’s mother has said she believes her son was further radicalised in prison.
Former defence minister Tobias Ellwood said yesterday that terrorists should be held in isolation to prevent radicalisation and London Mayor Sadiq Khan has called for a return to indeterminate sentences for terror offences.