A group of militants is believed to be trapped inside a house in north Kashmir's Sopore area, 55 km away from Srinagar, as security forces launched an offensive on Sunday.
Preliminary reports suggested that the security forces besieged the congested Krankshevan locality in the town around 5pm.
It all started after a search party came under fire from the militants believed to be hiding in a house.
Security forces warned people on mosques' address system against venturing into the cordoned area.
A source said the militants, in a bid to escape, launched a major offensive around 8pm. Security forces returned fire.
Security agencies suspect the presence of more than two militants.
The gunfight came just three days after three local militants were killed in an encounter in south Kashmir.
Earlier in the day, the army busted a guerrilla hideout in Kishtwar district and seized a large cache of arms and ammunition, a defence spokesman said.
"At 2.30 pm today (Sunday), troops of 8 Rashtriya Rifles and 9 Sector Rashtriya Rifles busted a militant hideout in Keshwan village of Kishtwar district," Colonel Manish Mehta said.
A large cache of arms and ammunition was seized from the hideout. The weapons included an AK-47 rifle, two pistols, a rifle, three .12 bore rifles, 60 kg RDX, one kg explosive with Russian markings, 40 detonators, three rocket propelled grenades, 43 hand grenades, 19 under-barrel gun ammunition, 608 rounds of AK-series ammunition, 940 rounds of 7.62 mm ammunition, 13 AK-series magazines and a radio set.
Two days ago, former Union minister Ghulam Nabi Azad had visited the village, where the hideout was busted.
(with IANS inputs)