Keras Functional API is a way to build more complex models in Keras that go beyond the simple sequential model structure. It allows creating models with multiple inputs and outputs, shared layers, and more flexible architectures. Instead of the linear model structure of the Sequential API, the Functional API defines models as a directed acyclic graph, where layers are connected by explicitly specifying the inputs and outputs. This enables building complex models with branching and merging layers, enabling greater flexibility in designing and training neural networks.