The suspected commander, named as Waseem Shah of Lashkar-e-Taiba (LeT), was killed after soldiers and special police forces acting on a tip off surrounded the southern village of Litter.
"In the ensuing gun battle the LeT commander and his bodyguard were killed," a police officer said.
Hundreds of local people took to the streets as news of the deaths spread, with some protesters pelting government forces with stones and shouting slogans for Kashmir's independence from Indian rule.
Security forces responded with gunfire that left one dead.
"One man died on way to hospital after he was hit with a bullet," another police officer said, adding that at least 15 others were wounded during the clashes.
Kashmiri people to mark Oct 27 as ‘Black Day’
Hours after Saturday's gunbattle suspected rebels attacked a police convoy in the southern Kulgam area, leaving one policeman dead.
"Reportedly three militants attacked. We retaliated. Our driver received a hit and later succumbed to injuries," inspector general of police, Munir Ahmed Khan said.
The area was cordoned as authorities searched for the attackers, Khan said.
At least 166 fighters and 59 security personnel have died so far this year.
India maintains presence of roughly 500,000 soldiers in its occupied part of Kashmir, deployed in villages and towns as well as along the Line of Control.
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