Deputy Chief of National Police Lt. Gen. Nanan Sukarna said the raid in Cigondewah village in West Java province was aimed at capturing four militants believed to be involved in last week's foiled embassy attack in Jakarta.
The suspects have been living in the rented house for the last four months, Sukarna said.
"Hopefully there are no casualties," Pradopo said, adding that residents living near the house were evacuated.
An Associated Press reporter at the scene said police were yelling for the militants to give themselves up. They counted down from three and then fired.
Local broadcaster MetroTV provided live coverage of the standoff, showing an officer in black riot gear standing behind a red house holding a rifle in a neighbourhood dotted with houses and rice fields.
Sectarian violence in Buddhist-majority Myanmar has killed scores, and thousands of Muslims have been driven from their homes.
Police said the men were part of a cell allegedly involved in recent attacks against Indonesian police.
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