Earlier, Indian soldiers laid siege around a village in Kahsmir's southern Shopian area after a tip that militants were hiding there, said Colonel Rajesh Kalia, an army spokesperson.
As the soldiers launched search operations, soldiers and militants exchanged gunfire, Colonel Kalia said. He said four rebels were killed. Police said three soldiers were wounded.
As the fighting raged, hundreds of people marched near the site in solidarity with the rebels and chanted slogans seeking an end to Indian rule over the region. Government forces fired shotgun pellets and tear gas at the stone-throwing protesters.
The latest gun battle came hours after Indian troops killed five militants in the same area, also triggering fierce clashes with villagers.
Violence has escalated in Kashmir in recent months as India has stepped up its counter-insurgency operations. Militants have also continued their attacks on government forces and alleged informants.
More than two dozen militants and about a dozen Indian troops were killed in April, the most in any month since last August, when India revoked the region's semi-autonomous status and statehood and imposed direct federal rule.
There also has been almost daily fighting over the last several months along the rugged and mountainous frontier that divides Kashmir between India and Pakistan.
India and Pakistan both claim the territory in its entirety. Most Kashmiris support the rebel goal of uniting the territory, either under Pakistani rule or as an independent country.
India accuses Pakistan of arming and training the anti-India rebels. Pakistan denies this, saying it offers only moral and diplomatic support to the militants and to Kashmiris who oppose Indian rule.
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