Security forces launched a cordon and search operation at village Kausarmullah in Chadoora area of Budgam following information about presence of militants in the area, a police spokesman said.
He said the militants were asked to surrender but they opened firing on the security forces positions.
"The firing was retaliated, triggering a gun-battle which was going on till last reports came in," the spokesman said.
He said there were no casualties reported in the encounter so far.