SOLINGEN, Germany (Reuters) - For the German city of Solingen, the evening began as a festival of diversity and ended after a bloody knife attack that left shocked and grieving residents asking why they had been singled out for such horror.

An improvised memorial near the scene where three people were killed and eight injured in the stabbing rampage had been created with red candles, flowers and a rainbow flag.

"Why?" read one large placard.

The city of 165,000, with its drab postwar low-rise buildings, is typical of Germany's industrial heartland in North Rhine-Westphalia. Solingen is known for its knife production industry, but knife attacks here and elsewhere in Germany are rare.

On Friday, Solingen had just kicked off a Festival of Diversity to celebrate centuries of history. Planned were three days of concerts, cultural activities and street artists.

But around 9:40 p.m., just hours into the celebrations, the attack unfolded in what local leaders called an act of terror.

The music stopped, crowds were asked to leave and the weekend-long event was cancelled.

The festival's website has been removed and replaced with a banner: "Solingen is grieving."

Markus Sossmer wandered the streets with his wife and child on Saturday.

"It's just sad ... It could have happened to anyone. I actually wanted to go to the festival but I'm glad that I didn't."

The city's mayor, Tim-Oliver Kurzbach, was on the verge of tears, saying it was as if the townspeople's hearts had been ripped out.

"We are full of shock and grief," Kurzbach said.

Messages of sympathy poured in from afar.

The head of telecommunications giant Deutsche Telekom, Tim Hoettges, who is a native son of Solingen, said on LinkedIn that the attack had hit hard.

"I am shocked, stunned and deeply saddened. I think of the people who only wanted to celebrate peacefully and joyfully and were the victims of an insidious act of violence," he said.

Politicians - including Interior Minister Nancy Faeser and Hendrik Wuest, the premier of North Rhine-Westphalia - arrived wearing dark clothes and offering condolences.

Residents inscribed their thoughts on placards at the makeshift memorial.

"Together we are STRONG," someone wrote in purple ink.

(Writing by Tom Sims; editing by Giles Elgood)