One of the youth identified as Zahid Rashid Ganai died when he was hit by a bullet near the Durbugh village gunfight site, a police official said.
"He was shifted to hospital for treatment following the bullet injury, but died later," he added.
Security forces on a specific information about presence of militants surrounded Durbugh village in Chadoora area of Budgam district early Tuesday.
As the security forces closed in on the house where the militants were hiding, they were fired upon, which triggered a gunfight, the official said.
Protests erupted in the area during the gunfight which is going on since 9 hours.
Protesting youths also pelted stones at a paramilitary CRPF vehicles at Nagam village, three km away from Durbugh village.
The CRPF vehicles were on their way to augment the strength of the security forces engaged in the gunfight.