The encounter killing of the four local militants set off a violent protest by the villagers following which the army opened fire causing injuries to 15 civilians, one of whom later died.
Acting on specific technical and human intelligence about the presence of militants, security forces swooped down on their hideout at Nagbal village, 70 km south of Srinagar and engaged them in an encounter, leading to their killing.
The security forces have achieved a "major success", Director General of Police S P Vaid told PTI.
"However, it is unfortunate that two soldiers were martyred and son of the house owner got caught in the crossfire and succumbed to injuries," he said.
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Officials present at the scene said a cordon was thrown around the village by Special Operations Group (SOG) of Jammu and Kashmir police at around 3:30 AM. The contingent moved in to mount the assault after a team of Rashtriya Rifles, a force carved out of the army for counter-insurgency operations, arrived around 4 AM.
In the ensuing encounter, two army personnel identified as Lance Naik Raghubeer Singh and Lance Naik Bhandoriya Gopal Sinh as well as son of the tailor were killed.
After a fierce exchange of fire which went on for nearly three hours, four militants identified as Muddasir Ahmed Tantray and Wakeel Ahmed Thokar (Lashkar-e-Taiba) and Farooq Ahmed Bhatt and Mohameed Younis Lone of Hizbul Mujahideen were killed.
The officials said three militants, believed to have been injured, ran into the adjacent forests. Dreaded Hizbul militant Altaf Kachroo was suspected to be among them. A hunt has been launched to apprehend them.
Four guns have been recovered from the scene.