He was released after a parole hearing on July 6 with several conditions imposed on him.
Those included GPS monitoring for a year, a ban from entering Manawatu and Rangitikei, and orders forbidding him from drinking alcohol and using guns.
Council finance manager David Paris, whose job includes having responsibility for council housing, confirmed Corrections had been asked to move Thompson on.
He said this was despite assurances given when Thompson was allocated a flat at Panama after his release that he was "very low risk", was being monitored and that the council had beenmade fully aware of his background.
The decision was inevitable once it was discovered a woman with close connections to the victims was already a tenant at Panama, he said.
Mr Paris said the circumstances of the murdered woman's daughter coming across Thompson were "bizarre" and "a one in a million chance" but left the council with no choice.
"We have put it to Corrections they will have to find him somewhere else to live," Mr Paris said.
Those already living at Panama had not been told of Thompson's criminal background before his arrival at the village.
Mr Paris said it had to be recognised that he had "done his time" and the council had no obligation to disclose his business to other tenants or to ratepayers in general.
"We don't want to see him driven out by a Nimby response but we hadn't known a woman with a close relationship to a victim was living there too," he said.
Mr Paris said the chance encounter with Thompson must have been "horrendous" for the young woman visiting Panama.
The Times-Age was first alerted to Thompson's presence at the village not long after his release date from prison.
At that time residents living at Panama did not know who he was but they said they felt uncomfortable because Thompson was wearing an electronic bracelet on his ankle, alerting them to the fact he was being monitored.