The funerals have been taking place amid heightened security of the four Israeli Arabs shot dead on a bus by a 19-year-old Israeli army deserter.
Thousands of mourners marched behind the coffins of two sisters in the town of Shfaram, where extra police have been dispatched in case of unrest.
Israeli Prime Minister Ariel Sharon called the shooting a reprehensible act by a "bloodthirsty terrorist".
The 19-year-old gunman was lynched by an angry crowd after the attack.
The army said the teenager, named as Eden Nathan Zaada from the Jewish settlement of Tapuah in the West Bank, had deserted in protest at the Gaza pullout.
He was wearing his army uniform and a skullcap when he opened fire in the northern Israeli Arab town.
Israel is due to pull its settlers and soldiers out of the Gaza Strip later this month, and correspondents say there have been fears of attacks by Jewish settlers opposed to the withdrawal.
Thousands of Muslims, Christians and Jews joined a procession through Shfaram in honour of the four victims, said to be two Muslim sisters and two Christians.
The BBC's Lucy Williamson in Shfaram says the atmosphere in the town is one of quiet sadness, with Thursday's raw anger replaced by grief.
Both Israeli Arabs and Jews have come from surrounding areas to express their solidarity, our correspondent says, placing flowers and candles at the scene of the shooting.
As the procession moved towards the burial site, the mourners chanted their condolences.
"Don't be sad," they told the women's mother. "All the children here are yours."
Palestinian leader Mahmoud Abbas has condemned the killings as a "savage crime" and criticised the Israeli government for doing too little to protect Palestinians, the AFP news agency reports.
The Palestinian militant group Hamas has threatened retaliation for the attack, in which at least 20 people were wounded.
Israel's chief of police, Moshe Karadi, has urged all Israelis to remain calm and await an official inquiry into the incident.
Israeli media reports say three teenagers were arrested in Tapuah on Friday on suspicion that they knew of Zaada's intentions.
Thousands of Israeli officers were earlier sent to northern Israel around Shfaram and to Jerusalem to prevent potential violence.
Fears of disturbances at the city's Temple Mount, a site holy to both Muslims and Jews, eased as Friday prayers came to an end without incident.
Arab Israeli leaders have urged people to show restraint during demonstrations in Shfaram after the funerals, Israeli police spokesman Avi Zelba told Reuters news agency.
A general strike was declared by Israeli Arabs across Israel.
Mr Zaada, described by the army as having a "problematic background", was believed to be a member of the outlawed extremist Kach party.
He is said to have deserted his unit a few weeks ago, after refusing to take part in the evacuation of Jewish settlements.
The 19-year-old is said to have deserted his army unit with his gun
His father, Yitzhak Nathan Zaada, said he had asked the army to find his son because he was worried his gun might fall into the wrong hands.
"I wasn't afraid he would do something," he told the Associated Press news agency. His son had said he would find time to return his weapon, he added.
Mr Sharon condemned the attack, saying: "This terror incident is a deliberate attempt to harm the relations between the citizens of Israel.
"Terror between civilians is the most dangerous thing for the future of Israel and its democratic stability," he added.
Settler groups have also denounced the violence.
The bloodiest attack on Arabs by a Jewish extremist dates back to 1994, when a US-born Jew, Baruch Goldstein, shot dead 29 Muslims at a mosque in the West Bank city of Hebron.