Police have recovered a granade from the terrorist who was killed. He has been identified as Fayaz Ahmad Aishwar. Police said he was involved in the Udhampur attack in 2015 and that the National Investigation Agency or NIA had announced a reward of Rs 2 lakh on him.
Three people were also injured when terrorists opened fire at a police party in the Mir Bazaar area of the district. The police party was regulating traffic in the area after a road accident.
The terrorists were travelling in a car when they attacked. Police say another terrorist was injured in the retaliatory firing.
"Apparently three terrorists were involved in the attack. One terrorist was killed in the retaliatory fire by police. One more is believed to be injured. One policeman and two civilians lost their life in the attack," said SP Vaid, Director General of Police Jammu and Kashmir.
Sources said a group of three militants first tried to snatch weapons from police but when they challenged them and caught hold one militant, a shoot out broke out.
Mr Vaid also said the police managed to snatch a pistol from one of the terrorists.
"While one terrorist has managed to escape, we are following the blood trail of another terrorist who was injured in the police action," the DGP said.