Chief Minister Pinarayi Vijayan directed Perinthalmanna Sub-Collector to conduct a comprehensive probe into the incident and submit a report.
The case, registered in connection with the encounter killing, was handed over to the Crime Branch, the Chief Minister's Office said in a statement.
The government's decision came in the wake of CPI, a major partner in ruling LDF, and human rights activists coming out against the killing of the Left rebels.
Two Maoists- Kuppuswamy Devaraj (65), a central committee member of the outlawed outfit and Ajitha (45), were killed in an alleged encounter with police in Nilambur forests on November 24.
The Crime Branch probe was ordered late last night by DGP Loknath Behara as the Supreme Court had in September 2014 laid down guidelines as per which in all cases of encounter deaths a mandatory registration of FIR and investigation by CID or any other independent agency was necessary.
According to police, the Maoists had opened fire at a patrolling party following which police retaliated, killing the two.
The attack took place in a 500-acre forest area in the Western Ghats, they said.
Improvised explosive devices, materials used to make explosives and explosive materials, solar panels, some battery chargers,a set of pen drives, a modem, an electronic tab, a pistol and 40 sacks of rice were also recovered from the hideout of the Maoists, police said.
Police also said the ultras fired at a police party on a combing operation in Nilambur area and two of them were killed in retaliatory firing.
The search operations were undertaken by a 60-member elite team of the Thunderbolt Force, based on a tip-off that Maoists were camping in the area.
Meanwhile, KPCC president V M Sudheeran said government should conduct a judicial probe into the "encounter incident" as both the crime branch and magisterial investigations announced were not enough to bring out the real truth. In a letter to Chief Minister Vijayan, he said there would not be any credibility in the probe by Crime branch as "it is another wing of police, which is facing allegations in the issue."
In the same way, the magisterial investigation carried out by a sub-collector, who is a government employee, also could not be considered as an impartial one, he said. "So, there should be a justifiable and impartial probe to convince people about the truth regarding the encounter incident," he said.
"It is appropriate to appoint an inquiry commission headed by a sitting or retired judge of High Court to investigate the incident," the Congress leader added.