Police paraded four people detained over last month's killing of 50-year-old Cesare Tavella along with a motorbike said to have been used as a getaway vehicle in the shooting late last month in Dhaka.
The killing near the capital's diplomatic zone was the first of a series of attacks to be claimed by the Islamic State group and was followed days later by the gunning down of a Japanese farmer in northern Bangladesh.
A weekend bombing of the main Shiite shrine in Dhaka, which killed one person and wounded dozens more, has further heightened the fears of minorities living in the mainly Muslim but officially secular nation.
But although that attack was also claimed by IS, the government responded on Sunday by denying the extremist group was active in Bangladesh and instead rounded up dozens of Prime Minister Sheikh Hasina's opponents.
"We want to say it clearly that the IS organisation does not exist in Bangladesh," Home Minister Asaduzzaman Khan Kamal told reporters Sunday.
Speaking after the four suspects were paraded before the media on Monday, Dhaka police said that they had all admitted killing Tavella on "the orders of a so-called big brother who offered them money".
"They carried out the murder to embarrass the government, to put the government under pressure and to create anarchy," Dhaka police commissioner Asaduzzaman Mia told reporters in a press conference.
Police described two of the suspects as drug addicts who have previous criminal convictions while another was a drug-dealer and the fourth was "a cold-blooded killer".
They did not however elaborate on the identity of the "big brother" said to have ordered the killing of Tavella who worked for a faith-based Dutch charity.
Bangladesh prides itself on being a mainly moderate Muslim nation but the gruesome killings of a series of atheist bloggers this year have rocked the nation and sparked a crackdown on local hardline Islamist groups.
After the foreigners' murder, international schools closed temporarily and embassies restricted their diplomats' movements, while Australia's cricket team cancelled a planned tour over security concerns.
As well as the attacks claimed by religious hardliners, Bangladesh has been plagued by deadly political violence blamed on followers of the main opposition Bangladesh Nationalist Party which boycotted elections in 2014.
Hasina and her allies have consistently blamed the BNP and its main Islamist ally Jamaat-e-Islami for both the unrest and the attacks on foreigners and religious minorities.
After the attack on the Shiite shrine, a former BNP lawmaker in Dhaka and several senior officials from both parties were detained.
Although police said the arrests were related to previous unrest and not linked to Saturday's blast, the BNP said the government was clearly using the heightened state of anxiety as a pretext to crack down on opponents.
Scores of opposition activists including Islamists have been detained since the start of the year when fresh anti-government protests erupted.
The unrest also threatens to hurt the economy, with representatives from international retailers who are the lifeblood of the vital garment industry cancelling or postponing trips to the country.