Two civilians were hit with bullets after forces opened fire to disperse the stone pelting protesters near the encounter site at Behmnoo village of Pulwama district on Monday.
The injured have been identified as Mohammad Saleem, a resident of Chawan Keller and Jahangir Ahmad Wagay son of Abdul Hamid, a resident of Abhama.
Both have been referred to Srinagar for specialized treatment.
Witnesses said that many protesters were hit with pellets near the encounter site as they tried to reach nearer to help the holed up militants escape.
Meanwhile, the encounter was going on when reports last came in. Police sources said that many militants were holed up in the village after forces cordoned off the area. A local militant Kifayat was killed in the initial firing. Another militant Jahangir was also killed however his body was yet to be recovered, they said.