The attackers killed five persons and wounded five others in a residential compound in Pishan county last evening, Hong Kong-based South China Morning Post said today.
The attackers were shot dead by police, it said, quoting residents in the area.
The county has issued the highest level of security alert after the authorities described it as a "terror attack".
The government did not identify the suspects and victims, but some residents said the attackers were Uygurs, the main Muslim ethnic group in Xinjiang, the Post said.
Xinjiang, bordering Pakistan-occupied Kashmir (PoK) and Afghanistan, has been on the boil for several years over Uyghur protests against the large-scale settlements of Han Chinese from different parts of the country.
China blames Uyghur separatists from the East Turkistan Islamic Movement for the attacks in the region, which has over 10 million Uyghur population of Turkik-origin Muslims.
In December, four knife-wielding men attacked a Communist Party office in Xinjiang's Hotan region and set off an explosive device, killing one person. Four assailants were also shot dead.
The attack took place at the entrance to a residential compound, which is in the west of the city, not far from the county government headquarters.
A restaurant owner told the Post that most businesses and shops were open despite the huge security presence.
"My business has not been affected. I don't smell fear in the air," the Uygur restaurant owner said.
Pishan county has been dubbed by officials as a "hotbed for terrorism", said an article in the state-run Global Times published following a suicide bomb attack three years ago.
Forty three people including four of the attackers were killed in the assault. Nearly 100 were injured.
The ETIM militants have been blamed for several terrorist attacks in China including a suicide attack at Forbidden city in Beijing in 2013.
(Reopens FGN 19)
In Pishan, many Uygurs openly challenge government's policies such as a ban on women and children wearing a veil to cover their face, the Post said, quoting a Global Times report.
Most Uygurs living in Pishan's villages do not speak Putonghua and the language barrier has widened the divide between Uygurs and Han Chinese, the report said.
Xinjiang's Communist Party chief Chen Quanguo has also launched a crackdown on the militants since he took office last year, including setting up a large network of small police bases and restricting the travel of some residents.
Two senior officials in Xinjiang were placed under investigation for corruption and dereliction of duty last month, days after a suicide attack rocked an office building in Karakax county.
