One civilian died after militants opened fire with automatic weapons in Srinagar's Lal Chowk area on Tuesday, police said.
Two paramilitary troopers and two civilians were injured.
"A civilian is dead. Two CRPF (Central Reserve Police Force) troopers and two civilians are injured. They have been taken to SMHS hospital," an officer said.
Police sources said militants fired from a close range at a CRPF posse guarding the main business hub in the city when it was bustling with shoppers.
People in the area were seen running for the cover when they heard gunshots as tension gripped Lal Chowk and adjoining localities.
"They shot at CRPF men on guard in the Koker Bazaar and fired from point blank range before escaping into a by-lane," a police officer told IANS.
Police and paramilitary forces cordoned off the area and its many labyrinthine lanes for searches.
Traffic was also diverted from the area.