The encounters between security forces and the militants, who were holed up in a house and another structure near the under-construction Mini Secretariat, erupted at around 7.30 AM and continued through the day.
"Three militants have been knocked down. The civilians, who were held hostage, have been safely evacuated. Operation is still on," Deputy Inspector General (DIG) Rajouri-Poonch range Johny Willian told PTI.
A policeman Rajinder Kumar was killed in the incident.
One of the injured is Sub Inspector of Special Operation Group (SoG) Manzoor Hussain and another a civilian Tariq, police said, adding the injured have been hospitalised.
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The authorities used drones to track down the militants who had taken shelter inside a house where an elderly couple lived and another structure. The couple was safely evacuated.
Inspector General of Police (IGP) Jammu Zone Danish Rana said body of one of the militants has been recovered and others are being recovered.
"The cordon in the area will remain intact till tomorrow as operation is on," Rana added.
"They (militants) are in a house, where there is a civilian couple. Forces are retrieving them. We have to evacuate the civilians first," he said.