The encounter in Putshai area erupted when militants fired at security forces who went there on receiving specific information about the presence of the ultras, an army official said.
Three militants were killed in the encounter, he said.
A Defence spokesman said the killing of the three militants is a "major blow" to militant outfits operating in Kashmir Valley.
"It is a major blow to the terrorist outfits that security forces today eliminated three-heavily armed terrorists without causing any collateral damage," Defence spokesman Lt Col N N Joshi said.
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The identity and group affiliation of the slain militants was yet to be ascertained, a police spokesman said.
Their bodies were handed over to local Auqaf of the village for burial after completion of legal formalities.
In another operation launched in Zudur area of south Kashmir's Pulwama district, security forces recovered a cache of war like stores including ammunition and grenades, the spokesman said.