The encounter which broke out on Saturday evening in Burbugh village in Imam Sahib area of the district Shopian has ended, said police officials.
Locals said encounter ended after forces razed a residential house to ground where the militants where believed to be trapped.
In the encounter, two militants have been killed and one arrested.
The slain militants have been identified as Altaf Ahmad, a resident of Awneera Shopian and Tariq Ahmad Dar.
The militant apprehdended from the site is identified as Adil, a resident of Chittipora in Shopian. Adil, sources said has joined the rebel ranks in May this year.