"Three terrorists, apparently Pakistanis, were killed in Handwara encounter," Director General of Police (DGP) of Jammu and Kashmir, S.P.Vaid, said.
A woman trying to escape from the house in which the militants were hiding was also killed in the cross fire.
Following specific information about the presence of the militants in Unsoo village, the security forces had surrounded it late on Sunday evening.
As they were closing in on the hide out, they were fired upon triggering the encounter.
Firing exchanges have ended, but police said searches were still on in the area.