The commandos located the two militants wearing suicide vests on the ground floor of the five-storey building and shot them dead, Army spokesman Brigadier General Fakhrul Ahsan said.
"Our commandos fired gunshots seeing the two militants on the ground floor of the five-storey building. We can confirm the two were killed," Ahsan said.
The suicide vest of one of them also exploded, he said.
"The entire area has become risky. Considering the overall situation, it will take more time for the operation to complete," he said in the briefing.
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The spokesman said commandos entered from the top of the building to avoid booby traps laid out on the ground floor and then used tear gas.
The officials said they were not sure about the number of militants inside the building but hinted that a top militant leader was inside the complex.
Counter-Terrorism and Transnational Crime chief Monirul Islam yesterday said they got information that JMB chief Musa along with some other JMB militants were in Sylhet.
The neo-JMB, said to be inclined to the Islamic State, was behind the July 1 terror attack on a Dhaka cafe in which 22 people, including 17 foreigners, were killed.
Hours later the Islamic State claimed responsibility for the attack through its propaganda news agency 'Amaq'.
The target of the attack was security forces, it said.
This was the third attack in Bangladesh in eight days for which the ISIS claimed credit.
Home Minister Asaduzzaman Khan, however, rejected the ISIS claim, saying that there was no presence of any foreign terrorist group in the country.
He said a top militant leader was inside the building as the crackdown was underway but quickly added "we cannot say anything before the end of the operation".
Citing one of the injured people, bdnews24.Com said that the second blast took place when RAB and police personnel went to the spot after the first blast.
CTTC Assistant Commissioner Rohmot Ullah Chowdhury said that there are multiple live bombs still hidden throughout the hideout.
"We have enforced today the Section 144 strictly barring peoples' entry within the vicinity for security following the casualties," a police officer told newsmen.
The Operation Twilight was launched after a suicide bomber on Friday night blew himself up at the international airport in Dhaka in an attack claimed by the ISIS. It came a week after an identical attack on a RAB camp in Dhaka.
Police had tracked down the Sylhet hideout less than a week after they busted two militant dens on the outskirts of the southeastern port city Chittagong.
Bangladesh has been witnessing a spate of attacks on secular activists, foreigners and religious minorities since 2013. The country launched a massive crackdown on militants specially after the Dhaka cafe attack.
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