The incident sparked tension in the area as a group of locals staged a violent protest demanding the body of the deceased militant, police said.
The protesters set ablaze two police mobile bunkers, prompting the cops to resort to a baton-charge and fire teargas shells to restore law and order.
An Army spokesman said that the encounter took place during a search operation by security forces in the forest area of Aripal village, 45-km from here, following information about the presence of militants there.
"The body of the militant has been recovered along with one AK-47 rifle," the spokesman said.
An Army jawan was also injured during the operation, he added.
Police identified the slain militant as Madani Bhai, a Pakistani national belonging to the JEM outfit.