Police say the operation at Tarzoo village in Sopore town was launched after a tip off about presence of two terrorists in the locality.
In the ensuing encounter, one terrorist was killed while another managed to escape, police said.
"Following information about the movement of militants in the area, the army laid an ambush in Haritar Tarzoo village during the night (Monday night)," a police official was quoted by news agency IANS.
A search operation is underway to sanitise the area.
Police have recovered arms and ammunition from the site of encounter.
The incident comes five days after a similar encounter in Bandipora. On December 29, security forces, acting on specific intelligence input, conducted a search operation in Shahgund village of Hajin area of the district.
The security forces were fired upon by the terrorists fired upon them, triggering an encounter.
(with inputs from agencies)