The police said: 'We are now treating it as murder.' The body was discovered by four children playing beside the Edgehill to Bootle freight railway line in Cherry Lane, Walton. They ran to tell police at a station near by.
The area was cordoned off and an incident room was established alongside the line, which serves mainly Seaforth docks and is not electrified.
The discovery, two miles from the shopping centre where James went missing, was made at 3.15pm. James's body was formally identified by an uncle. A Home Office pathologist was called in to establish the cause of death. Results of a post-mortem examination will be released at a press conference this morning.
Meanwhile, enhanced images from video recordings of James taken at the Strand shopping precinct in Bootle may enable police to identify two youths who led him away. James was holding hands with one of them as they turned right at the Marks and Spencer exit and headed towards a canal.
As the boys were leaving the precinct, security cameras watched James's mother, Denise, searching frantically for the child.
Police later extended the search to Breeze Hill reservoir, where a woman saw a child holding hands with two boys aged about 12. The sighting, less than a mile from the precinct, was made within an hour of James disappearing.
Detective Chief Inspector Geoff MacDonald said the woman had examined video pictures and was 'quite confident' they showed the same three boys.
Forensic scientists will be helped in the analysis of the video pictures by engineers from the BBC and IBM. The cameras made still recordings at three-second intervals. They show James leaving a butcher's shop at 3.39pm on Friday while his mother bought meat and reappearing on an upper floor.
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