Troops noticed suspicious movement along the Line of Control in Keran Sector, 167 km from Srinagar, on Sunday night.
However, on being challenged, the heavily armed terrorists opened fire, killing two army jawans.
The gunbattle was going on when last reports came in.
Meanwhile, another gunbattle is on in Pulwama district of South Kashmir.
Acting on a tip off, police assisted by security forces cordoned off Sangesuuni village, 40 km from Srinagar, to flush out two terrorists belonging to the Hizbul Mujahideen outfit, a police spokesman said.