The gunfight broke out on Tuesday evening after a joint team of the army and police cordoned off the area and launched a search operation on the basis of a specific information about the presence of terrorists.
As the security forces zeroed in on the spot where the terrorists were hiding they came under a heavy volume of fire that triggered the encounter.
After an overnight lull, firing resumed on Wednesday morning and three terrorists were killed.
The identities of the slain terrorists were being ascertained.
"Three terrorists killed in encounter in Srinagar, Search is going on," police said.
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