PTI quoting an Army official said that initially a brief exchange of firing took place between the two sides, prompting the security forces to strengthen the cordon to prevent the militants from escaping.
"Three militants have been killed in the operation which was going on when last reports came in. War like stores and weapons have been recovered from the scene of the encounter," the official said.
Clashes between protestors and law enforcing personnel broke out near the encounter site after some people pelted stones at the security forces engaged in the anti-militancy operation.
According to preliminary information, the militants were affiliated to Hizbul Mujahideen. One of the slain militants is believed to be Lateef 'Tiger', a close associate of the slain separatist poster boy Burhan Wani who was killed in an encounter in July 2016, the official said.
Police has, however, so far officially only confirmed that three militants have been killed in this encounter which has now ended.
"The identities of the slain militants will be confirmed after we recover their dead bodies," an officer said.
The house in which the militants were hiding was destroyed in the gunfight while two other houses were partially damaged.
One youth has sustained pellet injury during the mob control operation by the security forces.
Clashes also erupted in Anantnag, as news of Tiger's possible elimination spread. Lateef Tiger belonged to Awantipora town of Pulwama district.
A few of the other areas in South Kashmir were also reporting clashes as news of the encounter spread despite authorities suspended mobile Internet facility in all the four south Kashmir districts.
Train services between Srinagar and Banihal towns those passing through south Kashmir districts have also been suspended.
Shopian and Pulwama districts will vote on May 6 in the third and final phase of the three-phased polling in Anantnag Lok Sabha seat.
(With inputs from agencies)