Media reports said the exchange of fire in Srinagar's Ahmadnagar area ended on Thursday.
According to TV channel reports, a terrorist from the Pakistan based Laskhar-e-Taiba trapped in the area escaped, thus ending the encounter.
However, security forces are on a witch hunt to catch the terrorist responsible for the encounter in which at least eight policemen were injured.
The militant had attacked the forces with grenades and automatic rifles, said reports.
The latest is the third such encounter in past ten days in Kashmir.
Reports said Pakistan tried to push at least 30 to 40 terrorists inside India through the Keran sector, which is located about 100 km from Srinagar.
Indian Army said the infiltrators might be backed by special troops.
"There were some special troops, the training shows it. It is different from earlier attempts," Lt-General Gurmeet Singh of the Army's 15 Corps was quoted in media saying.
The Indian Army has been engaged in fending off the militants for ten days in what is being called the biggest border infiltration bid in recent years, backed by the Pakistan military.
A "determined and well-entrenched" group of militants with the suspected support of Pakistan Army's Border Action Team (BAT) special troops is locked in battle with Indian forces in the Keran sector of Kupwara district of Jammu and Kashmir.
Additional forces, helicopters and drones have been pressed into action by the Indian Army that said it has killed around 15 of the intruders since making first contact on Sept 24.
At least five Indian soldiers were wounded in the fighting that broke out earlier even as Pakistan Prime Minister Nawaz Sharif met his Indian counterpart Manmohan Singh in New York and spoke of seeking a "new beginning" in ties with India.
Both the leaders also discussed measures to reduce tensions along the 778-km-long Line of Control (LoC) following as many as 150 ceasefire violations by Pakistan being recorded by the Indian Army since January, 2013.
With the fresh outbreak of fighting, the Indian Army said the intruders have so far exhibited "an unusual resolve" to stand their ground and not, as is the norm, scurry back across the LoC after being intercepted.
However the Army denied reports that three to four Indian posts along the LoC had been "occupied" by Pakistan for the first time since the 1999 Kargil war.
The Indian Army had gunned down three terrorists who sneaked into Jammu and Kashmir and killed 12 people around Sept 26.
The 12 dead included six Armymen and four cops. They were killed in the twin militant attacks at a police station and an Army cantonment at Hiranagar area of Kathua district in Jammu.
--IBNS (Posted on 03-10-2013)