Yassin Salhi, 35, hanged himself from the bars of his cell using his bedsheets on Tuesday night, according to authorities at Fleury-Merogis prison, in the southern suburbs of Paris.
The driver and deliveryman carried out the grisly attack on employer Herve Cornara in Isere, southeastern France in June, displaying his boss's head outside the plant surrounded by Islamic flags.
He tried to blow up the facility but was arrested and remanded in custody.
Salhi had been placed in solitary confinement but was not considered a suicide risk. He had always disavowed any religious motive for his crime, but prosecutors were pressing charges of Islamic-related terrorism.
The married father-of-three was born in the eastern French town of Pontarlier, near the border with Switzerland, to a father of Algerian origin and a mother with a Moroccan background.
Salhi caught the attention of intelligence authorities in 2005 and 2006 because he was socialising with a group of people associated with radical Islam, a source close to the case told AFP in June.
Intelligence services investigated him for a few years thereafter, but did not renew their inquiry in 2008.
He popped up again on the intelligence services' radar in 2013 because he was associating with people suspected of links to radical Islam.
At the time he wore a beard and a traditional North African robe called a djellaba.
France is on high alert after a state of emergency was declared in the wake of last month's Paris attacks, when a group of Islamic extremists killed 130 people.
A jihadist plot was foiled last week in the French region of Orleans, southwest of Paris, Interior Minister Bernard Cazeneuve said Tuesday, as the government prepared constitutional changes to enshrine emergency police powers.