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Security forces launched a cordon and search operation in Padgampora village of Awantipora around 2.30 AM following information about the presence of militants in the area, a police official said.
He said the militants opened fire at security forces around 4.40 AM,which was retaliated by the law enforcement personnel.
The militants were hiding in two houses next to each other.
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The security officials had brought to the spot the mother of one of the militants holed up inside the houses in an effort to get him to surrender but he has refused to do so,he added.
Authorities have, meanwhile, suspended train services between Banihal and Srinagar apprehending that miscreants might target the trains along the south Kashmir tracks.