Two separatist militants have been shot dead in the Maloora village of Srinagar, Kashmir, ending a nine-hour gun battle.
It was the fourth such clash in the disputed Himalayan region in a week and comes amid fears of an escalation in rebel violence after a period of relative decline.
The spike in violence, security agencies suspect, may also signal a new rebel strategy to back popular street protests with increased militant attacks on Indian forces that they accuse of trying to put down the demonstrations with a heavy hand.
Police evacuated hundreds of residents immediately after a firefight erupted between troops and three members of the Pakistan-based Jaish-e-Mohammad militant group in a populated area on outskirts of Srinagar, Himalayan region's summer capital.
"We have recovered two dead bodies. Regarding the third...we are still searching," said Syed Ashiq Hussian Bukhari, Senior Superintendent of Police, Srinagar.
The heavy exchange of fire forced children, women and other residents to abandon their homes and flee to safer areas.
The militant violence comes at a time when New Delhi is struggling to calm anti-India protests on Kashmir's streets that have kept the region on the boil.
At least 110 people have been killed since June, mostly by police bullets, during the protests, biggest in two-decades.
