The three terrorists were holding hostage a civilian inside a house in Batote on Saturday.
The militants were encircled by the search parties inside the house in the main market after they managed their escape from the scene of the earlier encounter in the highway town in Ramban district, officials said.
The encounter started when the terrorist were trying to flee. They tried to stop a civilian vehicle at Batote on the National Highway (NH) 244 but the people at the bus stop informed the Army Quick Reaction Team (QRT).
The Public Relations Officer (PRO), Defence, Jammu said: "The QRT reacted promptly, established contact with the two individuals and an exchange of fire took place."
The trapped terrorists had fired at the Quick Reaction Team (QRT) of the Army in the morning and tried to escape but were chased by the security forces and encircled in a house, he said.
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The officials said the fresh exchange of fire started between the holed up terrorists and the security forces at around 1 pm after intense search operation despite inclement weather.
The house owner was believed to be trapped inside the house and efforts are on to evacuate him to safety, while his other family members have been evacuated to safety after they managed to come out, they said, adding the ultras had forced their entry into the house while being chased by the security forces.
The trapped terrorists had fired at the Quick Reaction Team (QRT) of the Army in the morning and tried to escape but were chased by the security forces and encircled in a house, he said.
The officials said the fresh exchange of fire started between the holed up terrorists and the security forces at around 1 pm after intense search operation despite inclement weather.
The house owner was believed to be trapped inside the house and efforts are on to evacuate him to safety, while his other family members have been evacuated to safety after they managed to come out, they said, adding the ultras had forced their entry into the house while being chased by the security forces.
In the morning, the terrorists hurled a grenade and opened fire at the QRT at Dharmund village, leading to a brief exchange of fire.
Reinforcements were immediately rushed and the whole area was cordoned off to neutralise the terrorists, who are believed to have come from the Kishtwar side and had reportedly spent the night at an abandoned temporary shelter shed on the highway, the officials said.
(Additional inputs from PTI)