The singer was doing an intimate gig in a pub near Kings Cross station when she spoke to the crowd.
"It was hard. It was hard for you guys I know, it was hard for me, because we all love music.
"And that's my friend, that's my cousin, that's my friend who loves music", she added before getting tearful.
Twenty-two people were killed in the attack at the Manchester Arena after an Ariana Grande concert on Monday night.
Many of the victims were children and teenagers - the youngest was just eight years old - and more than 100 people were injured.
"It's awful, its awful, it's awful," Katy said.
"Whatever you can do to help you should do. And even if you can't do anything that's fine.
"But what you should do is not let them win."
Katy then asked the small crowd to observe a moment of silence for the victims.
Her tribute comes two days before she is due to headline Radio 1's Big Weekend in Hull.
Radio 1 bosses said earlier this week the event will go ahead as planned, with extra security checks in place.
Organisers are asking guests to arrive earlier than usual to allow time for searches and other measures.