Abu Dujana, of the Lashkar-e-Taiba militant group, was gunned down with an accomplice in Pulwama district to the south of the region's summer capital Srinagar, police spokesman Manoj Pandita said. He had replaced Abu Qasim, who was killed previous year, as the main face of LeT in the Valley.
As the terrorists were inside the house, security forces blew up the house to flush out the terrorists in which Abu Dujana was killed.
The Indian Army in July released a list of 12 most-wanted terrorists operating in the Kashmir Valley and Dujana was among them.
According to police, Dujana, who hailed from Gilgit Baltistan, had infiltrated into the Valley in 2010 and remained active in north Kashmir during his initial stay in the Valley and later moved to south Kashmir.
Dujana and Bhat were killed in the exchange of fire that followed.
Meanwhile, intense clashes between protesters and government forces erupted near and around the encounter site, sources said.
The 27-year-old carried a reward of Rs 15 lakh, but officials said he was lately a nuisance who harassed women. According to a police official one civilian died in the cross-firing.
Khan added that security forces will not back off despite growing protests and outcry from global rights bodies for restraint by India to avoid civilian deaths.
During the firefight, both militants were killed, the official said. He managed to escape in May allegedly because of a mob that threw stones at security forces during an encounter. "Stone pelting or no pelting, disruptions or no disruptions, our operations will continue", Munir Khan said.
The Pakistan-born Lashkar commander was in charge of terror operations in the Kashmir Valley until recently and is the biggest terrorist to be killed since Burhan Wani. Sources in the police force told Mirror that Dujana, along with his associate, had come to meet his wife, and was tracked by police during his past visits.
In occupied Kashmir, Indian troops, in their fresh act of state terrorism, martyred three more Kashmiri youth in Pulwama district on Tuesday. Rasheed said that "the reaction from masses in entire Kashmir after the killing deserves and needs serious introspection".