It already has a name – DeCapiGate.

I’m not Associated Press reporter Sinan Salheddin, nor am I Kim Gamel, AP’s Baghdad news editor, but if I was investigating a story about a 20-corpse mass murder in—let’s say, Manhattan—then I’d try to find a local police officer at the scene to interview about the case.
I wouldn’t rely on a desk sergeant in Staten Island who merely heard reports of other officers being dispatched to check to see if there was such a crime, nor would I rely on a beat cop in Albany who is only reporting rumors of what he heard from friends of relatives in Queens.
But the Associated Press didn’t rely on the local police. Instead, they blatantly presented hearsay as the truth, and as a result, ran a story about a brutal massacre that currently appears to have never taken place.

Greyhawk, via Instapundit;

I’m shocked – shocked I tell you, to read this. I haven’t heard of such a thing since the last time the news reported a bogus headless bodies story.

Or the time before that.
On June 30th, the report was challenged.

June 30, 2007 Release A070630c
Extremists using false media reporting to incite sectarian violence
BAGHDAD, Iraq – Friday, news media reported a mass killing in a village near Salman Pak where 20 men were allegedly found beheaded. It now appears that the story was completely false and fabricated by unknown sources.
Upon learning of the press reports, coalition and Iraqi officials began investigating to determine if the reports were true. Ultimately it was concluded the reports were false.
Anti-Iraqi Forces are known for purposely providing false information to the media to incite violence and revenge killings, and they may well have been the source of this misinformation.
“Extremists promote falsehoods of mass killings, collateral damage and other violence specifically to turn Iraqis against other Iraqis,” said Rear Admiral Mark Fox, spokesperson for MNF-I. “Unfortunately, lies are much easier to state, the truth often takes time to prove,” said Fox.
Not all media reports can be immediately substantiated by Government of Iraq or Coalition Forces. They must go through a process to verify such claims, to include checking with various Iraqi Ministry’s, local police and security forces. Meanwhile, extremists have achieved their goal of spreading false information aimed at intimidating civilians and destabilizing Iraqi security.
Ultimately, media reporting based on verifiable sources will reduce the possibility of misinformation unnecessarily alarming citizens.

I know you didn’t learn this via the media that originally reported repeated the item.
AFP is one of few news services that has responded.

The US military accused the international media on Saturday of exacerbating Iraq’s violent tensions by reporting false claims of massacres which it said were deliberately fabricated by extremist groups.
This week several newspapers and agencies reported that Iraqi police had found 20 beheaded corpses in Salman Pak, just south of Baghdad.
AFP did not carry the report after its sources were unable to confirm the rumour.

While the Associated Press and their parrots in the mainstream media regurgitate second hand information from Iraqi “police” at locations more than an hour from the alleged crime scenes, freelance Iraq embed Michael Yon is delivering the goods on verifiable atrocities, supported entirely by his readers and out-performing them all. And he’s totally ignored.
This is why people cancel subscriptions.
Update – Both AP and Reuters have now retracted the story, citing the usual excuse: “war reporting is hard”. (Yes it is. See Michael Yon.)
Bob Owens;

Throughout the Iraq War, and with seemingly increasing frequency over the past year, these media outlets have become increasingly reliant upon anonymous sources and questionable sources hiding behind pseudonyms to deliver “news” with no apparent basis in fact.
In some of these instances, these wire services have been forced to retract days later, as they have with the false Um al-Abeed beheading story. Sadly, the international and national news outlets that often carry the initial claims as “page one” material fail to do so with the refutations, leaving most media consumers with the impression that the original account was accurate.
Remarkably, these news organizations continue to employ the same reporters and editors that have published multiple erroneous or highly suspect claims, or who have consistently cited discredited or disreputable sources.
Further, these wire services continue to employ newsgathering techniques that rely upon anonymous sources with little or no direct involvement with the story being reported, and often publish these claims as absolute fact, without any indication they are publishing what is often, at best, hearsay.
The MNF-I refutation of the Um al-Abeed decapitation story states that the claim was “completely false and fabricated by unknown sources.”
That isn’t exactly true. Both Reuters and the Associated Press presumably know precisely who their sources were for this story, as they know who their sources were for other discredited stories.
They just as they certainly know, or should know, which of their indigenous reporters—”stringers,” in industry parlance—have been providing these suspect or discredited stories, and which editors have allowed these stories to press based upon the flimsiest of evidence, which often does not meet the service’s own stated reportorial standards.
To date, these wire services have consistently failed to visibly enforce standards of reporting, and in some instances, have promoted employees involved in using questionable sources and printing false claims. Once promoted, these same employees only further degrade editorial standards, leading to the public’s increasing distrust of these news organizations.

And deservedly so.