The teen was one of six people stabbed Thursday by an attacker police identified as Yishai Shlissel, an Orthodox Jew released from prison in June after serving 10 years for stabbing marchers at a 2005 gay pride parade.
He was arrested immediately after the attack, Israeli police spokeswoman Luba Samri said.
"Our charming, happy, lively and beloved 16-year-old Shira was murdered just because she came to support her friends and any person's right to live their life their own way," Banki's family said in a statement. "With no purpose but with stupidity, evilness and recklessness, her life came to an end."
Her funeral was held Monday evening in Kibbutz Nahshon, about an hour's drive west of Jerusalem. It was closed to the media.
"Shira was murdered because she bravely supported the principle that each one can live their life in honor and security," Israeli Prime Minister Benjamin Netanyahu
said in a statement.
"We will not allow this despicable killer to undermine the core values that Israeli society is based upon. We contemptuously denounce his actions of hate and violence," he added.
Netanyahu also addressed the attack at his weekly Cabinet meeting Sunday, saying the stabbings and a separate incident -- in which an arson in the West Bank killed 18-month-old Ali Saad Dawabsha
and injured the boy's parents and brother -- represented "abhorrent crimes."
"I have instructed security and law enforcement officials to use all legal means at their disposal to apprehend the murderers and deal with the stabber and the arsonists to the fullest extent of the law," he said. "We are determined to vigorously fight manifestations of hate, fanaticism and terrorism from whatever side. The fight against these phenomena unites us all."
The Prime Minister also used the occasion to slam the Palestinian Authority, even though Banki's accused killer is Jewish and Palestinians apparently were targeted in the arson.
"This is what distinguishes us from our neighbors. We deplore and condemn these murderers. We will pursue them to the end. They name public squares after the murderers of children. This distinction cannot be blurred or covered up. It is important to say this even as we utter our condemnations and unite against the criminals among our people," he said.
Video from Israel's Channel 10 shows what appears to be part of the attack Shlissel perpetrated a decade ago. In it, a man makes quick slashing motions at people on a Jerusalem street, including one holding a rainbow flag, while others try to subdue him.
Channel 10 also aired video from the aftermath of Thursday's attack, showing several wounded people, including a woman in a bloody shirt being placed on a stretcher and into an ambulance. Another woman was shown bleeding from her arm as someone applied pressure to the wound.
"We came together today for a festive event, but the joy was shattered when a terrible hate crime occurred here in Jerusalem, the capital of Israel
," President Reuven Rivlin said of the incident.
"People celebrating their freedom and expressing their identity were viciously stabbed. We must not be deluded, a lack of tolerance will lead us to disaster. We cannot allow such crimes, and we must condemn those who commit and support them."