Incriminating material, including arms and ammunition were recovered from the encounter site in Gopalpora village of Chadoora area, an officer said.
The joint operation by the police and other security forces was launched late last night following credible inputs about the presence.
The militants had triggered the encounter firing the first shot at the search party, who retaliated leading to the gun battle that left the two terrorists dead. Their bodies have been retrieved.
Their identities and affiliations were still being ascertained.
Citizens have been requested not to venture inside the encounter zone as it might prove dangerous due to stray explosive materials, the police said, requesting people to cooperate till the area was completely sanitised and cleared of all explosive materials.