Based on specific information about the presence of militants in Nadigam area of Shopian, security forces launched a cordon and search operation, a police official said.
He said the search operation turned into an encounter after the militants fired on the forces, who retaliated.
The gunfight was ongoing in Nadimarg village.
"The operation is in its final stage now," the police said.
Authorities have suspended mobile internet services in the district as a precautionary measure.