"Several thugs" threw explosives late last night and attacked policemen, who were pursuing suspects in Shufu county, near the city of Kashgar, Tianshan Net, the region's official news portal, said. It described what happened as a "terrorist attack".
The police fought back and shot dead 14 'terrorists' and captured six criminal suspects. Two policemen died in the attack, state-run Xinhua news agency quoted police sources as saying.
Some media reports, quoting an overseas Uighur rights group, said police raided a house where members of the ethnic minority had gathered and started firing. The group said all 14 people killed by police were Uighurs.
Verifying reports from the region is difficult because the information flow out of Xinjiang is tightly controlled.
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An initial probe revealed the 14 'terrorists' shot dead were from a group promoting extremist religious ideas and making explosives for terrorist attacks, Xinhua said citing a Xinjiang police official.
The government traditionally blames extremists for the violence, while Uighur activists point to ethnic tensions and tight Chinese control as triggers for violence.
In late October, five people were killed when a car ploughed into a crowd and then burst into flames in Beijing's iconic Tiananmen Square.
Beijing called the incident a terrorist attack inspired by Xinjiang-linked extremists. Three people who died inside the car were identified by police as Xinjiang Uighurs.
The arrival of waves of the majority Han Chinese people over the decades has fueled tensions with the Uighur minority group. Chinese authorities have cracked down heavily on violence involving Uighurs, deepening resentment.