Two unidentified terrorists were killed in the daylong encounter with security forces at Shalimar area of the city on Friday, official sources said.
The encounter broke out in the wee hours after police assisted by security forces laid a cordon around Banigam locality on the banks of Dal lake, sources said.
Observing the movement of security forces, the ultras forced their entry into the house of a sub-inspector of local police and engaged the search parties in a gunbattle, the sources said.
The inmates of the house were evacuated to safety and the house caught fire in the crossfire, they said.
The terrorists, however, escaped to a nearby house and continued firing on the search parties, the sources said, adding that the second house also caught fire.
Both the houses were completely damaged and the bodies of two terrorists alongwith some arms and ammunition were recovered from the debris in the evening, the sources said.
They said the identity and group affiliation of the dead were being ascertained.