The arrested terrorists have been identified as Suhail Qadir Khanday, resident of Tral, Pulwama and Suhail Mushtaq, resident of Niklora.
As the security forces zeroed in on the spot where terrorists were hiding they came under a heavy volume of fire that triggered the encounter.
"It is suspected that a few men travelling in a vehicle opened indiscriminate firing on some persons travelling in another car. Two young men were killed and another seriously injured in this firing incident," a police official said.
In the last 16 days, terrorists have killed 11 non-local individuals in the Valley.
"The situation is bad. Non-locals are being targeted. Vendors and labourers are being targeted. We cannot stay back in Kashmir in these conditions,"
The deceased have been identified as Supinder Kour, a resident of Alochi Bagh area of the city here, and Deepak Chand, a resident of Jammu.
"Today is September 11, that is 9/11, a date in the history of the world that is also known for attacks on humanity. But this same date also taught a lot to the whole world," PM Modi said.
The attacks, which were planned by Al Qaeda from Afghanistan, saw four US passenger jets seized by suicide attackers two of which were flown into the Twin Towers of the World Trade Center in New York.
A Junior Commissioned Officer (JCO) of the Rashtriya Rifles had suffered bullet injuries in the encounter. He was immediately evacuated to the nearest medical facility, but succumbed to the injuries," Defence Public Relations Officer (PRO), Jammu, Lt Col Devender Anand said.
"They were planning a collection of arms dropped by drones and supply to active terrorists of Jaish-e- Mohammed in Kashmir valley; planting a vehicle-based IED in Jammu before 15th August and reconnaissance of important targets in other parts of the country," police said.
A BSF convoy moving on the Srinagar-Jammu national highway was attacked by the terrorists near the Malpora crossing in south Kashmir's Kulgam.
Terrorists barged inside the house of Ghulam Rasool Dar, who was also a sarpanch, and fired indiscriminately, critically injuring him and his wife. They were taken to a hospital where they were declared dead.
Arms and ammunition including an AK rifle, two AK magazines, 40 AK rounds, one pouch, one wireless set and one medicine bag were recovered from the site of encounter.
The ATS had arrested Maseeruddin and Minhaz Ansari from a house in Kakori area on the outskirts of Lucknow on July 11, after a seven-hour operation.
In what is the first instance of Pakistan-based terrorists deploying drones to strike vital installations, two bombs were dropped at the IAF station in Jammu airport in the early hours of Sunday, causing minor injuries to two IAF personnel.
Militants shot dead a special police officer and his wife in Jammu and Kashmir's Pulwama district on Sunday, while their daughter suffered injuries, officials said.
Two terrorists with pistols shot dead a police inspector on the outskirts of Srinagar on Tuesday evening, officials said.
"For enduring peace in Afghanistan, terrorist safe havens and sanctuaries must be dismantled immediately and terrorist supply chains disrupted. There needs to be zero tolerance for terrorism in all its forms and manifestations"
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