Security forces have surrounded a mosque in Palnu village near Kulgam, 75 km from Srinagar, where three militants are holed up.
The police say troops of the Rashtriya Rifles and police had surrounded the village on Sunday morning after specific information about the presence of militants.
"After a brief exchange of fire with security forces, the militants entered the village mosque," a senior office police official said.
He said fresh reinforcements were rushed to the village and the mosque was surrounded.
"Intermittent fire exchanges are continuing. Senior district civil officers and police officers are at the spot trying to persuade the militants to surrender," he added.
The area remained tense as the stand-off continued.
