The occupied valley has witnessed a surge in violence with more than 100 people killed since the start of the year.
In the latest incident, Indian forces killed three ‘gunmen’ and a civilian allegedly being used as a human shield in Kulgam district in southern Kashmir, police said.
Hundreds of civilians marched on the village, chanting anti-India slogans and throwing stones at government forces who responded with live rounds, pellets and tear gas.
"Two civilians died when they came close to the encounter site," local police chief Shesh Paul Vaid told AFP.
An Indian soldier who was wounded during the fighting died later in a military hospital, Vaid said.
The violence comes shortly after 20 Kashmiris were martyred in a single day earlier this month.
Separatists in Indian-held Kashmir have been fighting security forces for decades for independence or for a merger with Pakistan. Tens of thousands, mostly civilians, have died.
On Wednesday, students protested against Indian rule at Srinagar's largest university, while shops were closed in the city.
Tensions were particularly high before Wednesday's violence: two police officers were implicated this week in the rape and murder of an eight-year-old girl whose body was found in January.
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