It also emerged Butt was a key contact of London bomber Mohammed Siddique Khan, as well as the hate preacher Anjem Choudary.
Britain's top counter-terrorism officer Mark Rowley said Butt was known to the security services, but there was no evidence of "attack planning" by him.
The father-of-two, who reportedly appeared on Channel 4 documentary The Jihadis Next Door, was investigated in 2015 but was part of a probe "prioritised in the lower echelons of our investigative work", Rowley said.
The disclosure means that perpetrators in all three of the terrorist outrages to hit Britain this year had at some point appeared on the radar of authorities.
Butt, who reportedly went by the name Abu Zaitun, was known to neighbours by the nickname "Abs/z" and was allegedly an associate of radical hate preacher Anjem Choudary.
Both killers lived in Barking, east London, and it is not yet known how the two men knew each other - with work to understand more about the trio and their connections still under way.
During the eight-minute long slaughter, the three knifemen ploughed into pedestrians on London Bridge using a van and went on to stab people in Borough Market with 12-inch knives.
The attackers, wearing fake suicide vests, were shot dead by eight officers after police unleashed a hail of 50 bullets upon them.
36 people remain in London hospitals, with 18 in a critical care.
As the nation collectively grieves following the third terror attack to hit the country in three months, a minute's silence will observed on Tuesday at 11am local time in memory of the victims.