Police officer Nitish Kumar says the local militant was killed Wednesday after army and police laid a siege around Naina village overnight on a tip that militants were hiding there.
Scores of youth chanted pro-independence slogans and hurled rocks at government forces in Naina and the neighboring Batpora village as the gunbattle raged in the area.
Police resorted to shooting in the air and tear gas to quell the protests, the Associated Press reported on Wednesday.
Rebels have been fighting since 1989 for Kashmir's independence or merger with Pakistan, which controls another portion of the territory in the west. More than 68,000 people have been killed in the conflict.