Friends, family and admirers displayed pink ribbons as they listened to various speakers celebrate her life.
Kayla Mueller's death was confirmed in Syria this month by her family and the American government.
Islamic State militants said she died in a Jordanian air strike.
But the Pentagon says that it does not know the exact circumstances of her death.
Members of local churches and community groups in Prescott wrote scrapbook messages and signed cards in Ms Mueller's memory, with many describing her as the best of humanity.
Her brother, Eric, urged the crowd to emulate her example in life and reach out to suffering people.
"May God keep you from any more harm, any more hurt," he said.
"You are in His hands now. You do not have to suffer anymore. Only now will you be able to see how much you did and truly did for this world by looking down on it from above."
Ms Mueller travelled to the Turkey-Syria border in 2012, to work for the Danish Refugee Council and Support to Life, according to her family.
On 4 August 2013 she was taken captive by Islamic State in Aleppo, Syria, while leaving a hospital run by MSF (Doctors without Borders).
Hundreds of people in the US state of Arizona have held a candlelit vigil in honour of American aid worker Kayla Mueller who died while being held hostage by Islamic State militants.