A US-made M4 rifle used by Pakistani Army's special forces was recovered following the encounter yesterday, and is being described as a "breakthrough".
An Army soldier was also killed in the fierce gunbattle in Aglar area and two AK-47 rifles were recovered.
The killed militants have been identified as Mehmood Bhai, the so-called divisional commander of Jaish in the south; Tallah Rashid, Masood Azhar's nephew; and Wasim Ahmed Ganie.
A Jaish spokesperson identifying himself as Hassan Shah sent a statement to local news agencies claiming that one of the slain militants was Tallah Rashid, the nephew of Maulana Masood Azhar.
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Inspector General (Kashmir Range) Munir Khan thanked the militant outfit for acknowledging the identity of the killed militant, and said the state police would like to request Pakistan to claim the body of the two foreign militants.
Azhar was one of the three militants released by the Centre in exchange for passengers of the Indian Airlines plane hijacked from Kathmandu to Kandahar in southern Afghanistan in December, 1999.
The senior home ministry official said in Delhi that Tallah Rashid is understood to have infiltrated into India about four months ago with a group of 15 others.
The weapon is mostly used by the US Army in its wars in Afghanistan and Iraq.
"M4 Carbine is a US-made weapon, presently with a lot of armies in NATO and it is also with the Special Forces of the Pakistan Army. So we have reason to believe that this particular weapon was given by the Pakistan Army to the JeM cadre. This clearly shows the complicity between the JeM and Pakistan and its nefarious designs in Kashmir," he said.
He added that there were reports that 10 such rifles were brought by terrorists who infiltrated from across the border recently.
While the number of militants has not come down, the level or quality of militancy in Kashmir "definitely has come down", Raju said.
"The quality of people who are joining is definitely being compromised and the relative level of peace that is there in the environment is ensuring that the government is able to function better... That is an important development," he said.
"My understanding is that there is too much relationship between this and radicalisation... This void is being filled by JeM... So, this fundamentally tells me that the Valley wants peace and to get back to normalcy but is not being permitted by Pakistan," he said.
Kashmir IG Khan said police would launch a thorough investigation to ascertain how such a weapon reached the hands of militants.
"The matter will have to be taken through different channels, with embassies concerned," he said.
In his view, displaying the pictures of new weapons on social media was a part of the psychological war by militants.
Commenting on stone pelting, CRPF Inspector General Zulfiqar Hassan said people should understand that there is a limit to everything.
"Yesterday, after a gap, we noticed a lot of stone pelting. It started from Pulwama and continued till where the operation was taking place. We would like to reiterate that we are fully capable of facing these situations."
After his release along with two other terrorists -- Sheikh Omar and Mushtaq Zargar, Maulana Masood Azhar formed Jaish-e-Mohammed, believed to be responsible for many terror incidents, including the 2001 attack on Parliament.