Gunfire erupted between police and 10 suspected militants early on Sunday morning in a house where the group was holed up.
Police said the seven dead were killed by bullets from their own men. "When the firing stopped, seven terrorists were found dead by the firing of their own accomplices and the remaining escaped in the darkness of the night," a police statement said.
Peace in Pakistan is the result of countless sacrifices by people, army: Gen Raheel
Police said the militants belonged to Tehreek-e-Taliban Pakistan (TTP) and the banned sectarian group Lashkar-e-Jhangvi (LeJ).
They were accused of planning attacks on security posts and law enforcement agencies in Punjab.
Rights activists have blamed police for staging raids to kill suspects they fear could be freed if tried in a court.
The government launched a countrywide campaign against militancy called the National Action Plan (NAB) in 2015 after a deadly Taliban attack on Army Public School (APS) in Peshawar killed more than 150 people, mostly children.
The Sunni LeJ group has claimed responsibility for some of the most brazen attacks on Shias in recently, including a January 2013 bombing in Quetta that killed over one hundred members of the Shia Hazara minority group.
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Sectarian violence -- in particular that carried out by Sunni militants against Shias, who make up roughly 20 per cent of the country’s population of 200 million -- has claimed thousands of lives in Pakistan over the past decade.
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