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Four blood-soaked rucksacks have been recovered from the site of the gunbattle. M-4 carbines were also found, the officials said.
"The terrorists are holed up in a riverine in Assar," an official said.
The terrorists crossed into Doda from a forest near Patnitop in adjacent Udhampur district after a brief exchange of fire between security forces and terrorists there, they said.
According to officials, security forces established contact with the terrorists around 6 pm in Udhampur on Tuesday. The encounter began about half an hour later and continued intermittently until both sides paused. A cordon was established overnight.
The search was resumed at daylight. At about 7.30 am today, there was a renewed exchange of fire, officials said.