A police spokesman on official twitter account of J&K police tweeted, "Cordon and Search operation being carried out at Wani Mohalla #Khudwani, Wanpoh, District Kulgam turns into an encounter".
"However, the militants had changed the positions during the night and they managed to flee from the area taking advantage of clashes between stone-pelting youth and security forces".
Earlier, it was reported that two militants were killed in the encounter as the house in which the ultras were trapped was blasted by security forces. Two other security personnel were also injured.
Police issued a statement saying the civilian deaths took place as a result of crossfire between the militants and security forces. Two more Army personnel were injured and shifted to hospital for treatment, they said.
The martyred soldier has been identified as Sepoy Sada Gunakara Rao.
"Army had even used helicopter gunships to fight out the militants".
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Officials said the deceased, identified as Bilal Ahmad Dar, 13, a resident of Kujjar village in Qaimoh tehsil of Kulgam district, was declared brought dead at sub-district hospital Qaimoh.
Mehbooba Mufti said there is an urgent need to get together to get Jammu Kashmir out of this vicious cycle of violence and killings.
The authorities immediately placed key separatist leaders under house arrest in Srinagar, closed educational institutions in Kulgam and in neighboring district of Anantnag and northwestern Sopore town, suspended trains services between Srinagar and Banihal and snapped mobile, internet services in some parts of the Valley.
Kashmir's Joint Resistance Leadership, including Syed Ali Gilani, Mirwaiz Umar Farooq and Muhammad Yasin Malik, have called for a complete shutdown on Thursday across the area against the killings.
"All of us are sitting in one room of our house and continue to hear gunshots", a local from Kulgam, who lives near the encounter site, told ET over phone.