The encounter broke out in the Satora area of Tral, around 36 km from Srinagar and at least four-five terrorists are believed to be holed up inside the forest.
The police officer also said the search operation was launched on information about the presence of some terrorists in the area.
Another official told that the search operation turned into an encounter after terrorists opened fire on the security forces.
The operation was jointly launched by the army, police and CRPF.
More than 50 per cent of around 220 active terrorists in Kashmir are Pakistan nationals, a home ministry official said on Thursday.
He also said that infiltration bids have seen a rise in last five months.
(with inputs from PTI )