Indian troops laid a siege around a southern village in Qazigund area overnight on a tip that militants were hiding there, police said. A fierce gunbattle erupted early Saturday, and hours later, five local Kashmiri rebels were killed.
Residents said troops blasted at least one residential house with explosives.
The slain rebels belonged to the region's largest rebel group, Hizbul Mujahideen, police said.
The fighting sparked anti-India protests and clashes as hundreds of residents chanting pro-rebel slogans and seeking end of the Indian rule over the disputed region tried to march to the site of the battle in solidarity with the militants. Government forces fired bullets, shotgun pellets and tear gas at the stone-throwing protesters, killing a young man and injuring at least 15 other people, residents and police said.
India and Pakistan each administer part of Kashmir, but both claim it in its entirety.
Most Kashmiris support the rebel cause that the territory be united either under Pakistani rule or as an independent country while also participating in civilian street protests against Indian control. In recent years, mainly young Kashmiris have displayed open solidarity with rebels and sought to protect them by engaging troops in street clashes during military operations.
Rebels have been fighting Indian control since 1989. India accuses Pakistan of arming and training the rebels, a charge Pakistan denies.
Nearly 70,000 people have been killed in the uprising and the ensuing Indian military crackdown.