The encounter took place at village Malikpora in Vilgam area of Handwara, 85 km from Srinagar, when Army and police launched a joint search operation following information about presence of terrorists there, a senior police officer said.
He said the hiding terrorists opened fire on the security forces, who retaliated, triggering off a fierce gunbattle which lasted several hours.
Two terrorists, believed to be foreigners, were killed and an army officer identified as Major Sandeep Kotwal was injured in the gunbattle.
Some arms and ammunition were recovered from the possession of the slain terrorists.
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