Security forces have been engaged in the gunbattle to flush out the militants, believed to be two, who are hiding in a house in Bijbehara area, a police official said.
One of them is suspected to have been killed in the encounter but it can be confirmed only when the bodies are retrieved, he said.
The civilian casualty took place when security personnel were dealing with a mob of stone-pelters who were targeting the forces near the encounter site to distract them from the operation to flush out the hiding militants.
Local residents alleged that Shah was killed in action by security forces action against the protestors.
Security forces launched a cordon and search operation in the area last night following information about presence of at least two militants in the area, the police official said.
He said an encounter broke out between the security forces and militants in the early hours today, which was continuing till last reports came in.
"The security forces tried to enter the house where the militants are hiding several times during the day but each time had to retreat in view of firing from the ultras," he said.
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