Bukhari was a protected journalist, guarded by two armed policemen round the clock, in a disputed area of India where political violence and threats to reporters is commonplace.
An eyewitness said: "I heard a few shots from my office and thought kids were bursting crackers on the eve of Id".
Bukhari, 50, was hit multiple times in the head and abdomen and taken to hospital where he was pronounced dead around 7.30pm, police confirmed.
One of his guards was also killed in the attack and another is critically injured, police told the BBC.
A police official at the scene said: "It appears to be a very well-planned attack".
This has meant that journalists in the region have often worked under tremendous pressure from all sides. In the past too, we have lost many journalists. "This highlights how much hard conditions journalists are working in Kashmir".
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Addresing the media, IG J&K Police confirmed that Bukhari was assassinated in a terror-related incident and an SIT has been constituted under Deputy Inspector General (central Kashmir) V K Virdi to investigate the matter. He was instrumental in organizing several conferences for Kashmir peace.
Pakistan's Ministry of Foreign Affairs said in a statement that the killing "cannot be condemned enough", and praised Bukhari for "carrying out his professional responsibilities with courage and conviction".
"Journalists working in Jammu and Kashmir have always been subject to a range of threats".
Groups fighting for the independence of Kashmir or its merger with Pakistan have rejected the brief religious "ceasefire".
Regretting the "mysterious killings" Geelani said the "difference of opinion is no way a crime to kill a person".
Police sources have speculated the killing might be related to Bukhari's involvement last August in a private peace-building initiative involving activists and members of the Indian and Pakistani governments.