Mobile communication in was suspended North Kashmir following the encounter to thwart any possible protests. Services of all service providers except state-run BSNL were barred.
Security forces had launched a cordon-and-search operation in Natipora area of Sopore at around 3:30 am after receiving information about the presence of militants there, PTI said quoting a police official.
The gun-battle was triggered after the two militants opened fire on the forces during search operation.
Curfew-like restrictions were imposed on Sunday in the districts of Anantnag, Pulwama, Kulgam and Shopian all in south Kashmir, as also in seven police station areas of Srinagar and in Sopore township in north Kashmir.
Normalcy returned in Kashmir valley on Wednesday with officials saying that life was going on normally across the valley.
The restrictions were placed following the killing of Sabzar and his colleague in the encounter in Soimoh area of Tral in south Kashmir's Pulwama district a day earlier.
Sabzar Bhat, 31, and one of his associates, Faizan Muzaffar, were cornered in a house in Tral, south Kashmir, where they had taken shelter after a chance exchange of fire.
The two militants were eliminated after the forces pulverised the structure with heavy ammunition.
Soon, the Valley erupted in pro- azadi protests, and clashes broke out between protesters and security forces at many places. At least one youth died in Tral and dozens were injured.
The authorities shut down Internet services and rushed thousands of security personnel to the trouble spots.
Within hours of Sabzar's death, shopkeepers pulled down shutters and traffic went off the roads. Separatists have called a two-day shutdown from tomorrow and asked people to march to Tral on Tuesday.
Sabzar's death has given the security forces their biggest breakthrough since militant poster boy Burhan was shot dead in a gunfight in Kokernag, south Kashmir, in July last year. The long spell of unrest that followed left nearly a hundred civilians dead and thousands injured in clashes with security personnel.