Fighting erupted in the central Sidi Bouzid region yesterday, when members of the National Guard raided a house where the militants were holed up, a police source told AFP.
In addition to the seven police killed, two gunmen also died in the ensuing firefight, state television reported.
In the meantime, a keenly awaited speech in which Islamist premier Ali Larayedh was expected to announce his government's intention to step down under the terms of a deal with the opposition was heavily delayed.
"We hope that Larayedh will have enough courage to announce the resignation of his government within three weeks to save the country," Hamma Hammami, a leader of the opposition Popular Front party, told AFP.
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Parliament speaker Mustapha Ben Jaafar said on Tuesday evening that he expected Larayedh to announce his commitment to resign, paving the way for the launch of the dialogue with the opposition.
Some 60 opposition MPs who have been boycotting parliament since the the July murder of opposition MP Mohamed Brahmi said they had received assurances the dialogue would begin with a "clear commitment" by Larayedh to quit.
The prime minister has previously said he would only step down once a new constitution has been adopted, in line with the roadmap drawn up by mediators and agreed to earlier this month by his party.
Mediators hope the long-awaited dialogue will mark a crucial step in the country's democratic transition and avert the kind of turmoil that has rocked Egypt since a military coup ousted elected Islamist president Mohamed Morsi in July.
The deadly fighting in Sidi Bouzid highlighted opposition complaints of inadequate action by the Islamist-led government to rein in jihadist groups, who are blamed for the murder of Brahmi and another opposition MP in February.