"It is a Neo-JMB den where two militants were killed in the encounter...It (operation) is still underway," a senior police officer told reporters.
One of the militants detonated his suicide vest when police entered the single-story building at Bazrapur around Jhinaidah district, officer-in-charge of Moheshpur Police Station Ahmed Kabir was quoted as saying by the Daly Star.
The second militant died in another suicide blast inside the building, he added.
The security forces now await arrival of a special bomb disposal unit at the scene to launch the "final assault" to flush out the rest of the militants, the official said.
More From This Section
Media reports earlier said the elite anti-crime rapid Action Battalion (RAB), police's counter-terrorism team and transnational crime unit (CTTC) and district police laid a siege along the hideout since midnight after receiving information that the militants were inside the house.
Bangladesh witnessed an intensified anti-militancy clampdown across the country as the police headquarters recently circulated a list of nearly 5,000 suspected militants to all district police chiefs.
On March 31, eight militants blew themselves up with a grenade after the security forces raided their hideout north of the Bangladeshi capital.
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.
The Islamic State has claimed several attacks in Bangladesh, but the government rejects the presence of foreign terrorist groups in the moderate Muslim-majority country, blaming home-grown groups such as the neo-JMB for terrorist attacks.