Government forces were battling a group of suspected rebels inside a government compound on Monday in the Indian-controlled portion of Kashmir.
Police said army and paramilitary soldiers cordoned off a government compound close to the main highway after gunshots were heard near saffron-rich Pampore town in the outskirts of the region's main city of Srinagar on Monday.
An officer, speaking on condition anonymity in keeping with department policy, said units of army's Special Forces, paramilitary soldiers and counterinsurgency police encircled one of the buildings in the sprawling compound where militants were believed to be hiding.
The officer said the rebels were exchanging intermittent gunfire with the soldiers.
Occasional grenade explosions were also heard from the site.
One soldier was reported injured in the initial fighting.
As the standoff continued, scores of people living on the western flank of the compound across a river hit the streets and chanted slogans against Indian rule in a show of solidarity with the rebels. The residents ignored government orders to stay away from the site of the gunbattle.
In February, five soldiers, three militants and a civilian were killed in the fighting in a three-day standoff in the same compound.
The attack comes as Kashmir is experiencing its largest protests against Indian rule in recent years, sparked by the killing in July of a popular rebel commander by Indian soldiers.
The protests, and a sweeping military crackdown, have nearly paralysed daily life in Indian-controlled Kashmir.
More than 80 civilians have been killed and thousands injured, with hundreds among them blinded and maimed, mostly by government forces firing bullets and shotgun pellets at rock-throwing protesters. Two policemen have also been killed and hundreds of government forces injured in the clashes.
India and Pakistan each administer a portion of Kashmir, but both claim the disputed Himalayan region in its entirety. Most people in the Indian-controlled portion favor independence or a merger with Pakistan.
Rebel groups have been fighting since 1989 for either independence or a merger with Pakistan. Since then, more than 68,000 people have been killed in the armed uprising and ensuing Indian military crackdown.
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