Information Minister Firdous Ashiq Awan met journalists participating in a protest outside Parliament shortly before dawn and said Justice Saqib Nisar of the Supreme Court would head the independent judicial commission to investigate the murder.
A notification issued by the government on the judicial commission said the appointment of Justice Nisar was subject to his acceptance.
The other members of the commission are Justice Agha Rafiq and two senior police officials of Punjab and Islamabad.
The commission will "inquire into the background and circumstances of abduction and subsequent murder" of Shahzad, identify culprits involved in the incident and recommend measures to prevent recurrence of such incidents against journalists.
The panel will submit its report and findings within six weeks.
The government had on Tuesday formed a panel headed by Federal Shariat Court Chief Justice Agha Rafiq to investigate the abduction and killing of Shahzad, who went missing two days after he alleged in an article last month that Al-Qaeda elements had infiltrated the Pakistan Navy.
However, journalists' organisations insisted the probe should be handled by a serving Supreme Court judge.
Addressing journalists, who had organised a protest, Information Minister Awan said it was the government's duty to safeguard the lives of scribes and ensure their well-being.
The Pakistan Federal Union of Journalists (PFUJ), which had organised a 24-hour dharna outside Parliament, decided to end the protest following Awan's announcement.
The protest was visited by parliamentarians, political leaders and workers of almost all political parties and members of civil society and rights groups, who expressed solidarity with journalists.
The dharna received extensive coverage in the media, with many TV talk show hosts conducting their programmes at the venue of the protest last night.
"We have no political agenda. We are here to demand a fair judicial inquiry into the murder," said PFUJ President Pervaiz Shaukat.
Main opposition PML-N chief Nawaz Sharif visited the protest venue and said he agreed with the journalists' demand that the probe should be led by a serving Supreme Court judge.
"The invisible elements active behind such activities must be uncovered now," he said.
Shahzad was kidnapped while driving from his home to a TV station in Islamabad on May 29. His body, bearing marks of torture, was found in a canal in Punjab province the following day.
Journalists' organisations and rights groups blamed the ISI of abducting Shahzad, a charge denied by the spy agency.