The incident follows the mysterious death of Maxim Borodin, a Russian journalist who reported on Wagner Group mercenary deaths in Syria.
Vasily Gritsak, head of the Ukrainian Security Service, told reporters the agency faked Mr Babchenko's death to catch those who were trying to kill him.
According to the SBU, the Russian special services ordered the murder of Babchenko and paid an unnamed Ukrainian citizen, $40,000 to organize the murder.
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Babchenko, 41, rose to fame as a war correspondent in Russian Federation.
He reported on Russia sending private military contractors to Syria and the downing of Malaysia Airlines Flight MH-17 in July 2014 in eastern Ukraine, for which investigators last week held the Russian state responsible.
During an interview with Israeli journalist Lisa Rozowski in 2017, Babchenko provided a humorous reason for his fierce determination to oppose the current Russian administration.
Babchenko had been scathingly critical of the Kremlin in recent years.
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Ukrainian and Russian officials immediately blamed one another over his death.
Ukrainian authorities have said they think Babchenko was killed because of his work. He said his comments had resulted in thousands of threats, his home address being published online and calls for him to be deported.
Babchenko thanked the Ukrainian security service for saving his life.
Babchenko was widely respected in Russian Federation and Ukraine's journalistic communities as an unblinking and remarkably talented chronicler of war. Russian authorities again denied any connection with the plane's downing over an area of Ukraine held by pro-Russian separatist forces.
Dmitry Muratov, the former longtime editor for the independent Russian newspaper Novaya Gazeta, said the killing recalled the murder of one of Russia's best-known commentators, Anna Politkovskaya, who was killed, execution-style, inside her apartment building in Moscow in 2006. It was shot down and 14 people on board were killed.
"I used to be a good soldier", Babchenko wrote in 2017.