A search operation has been on since Saturday night and the area has been cordoned off.
Security forces have already trapped three to four terrorists.
The terrorists were gunned down by jawans of 8 Rashtriya Rifles (RR) and Jammu and Kashmir Police.
He had said troops noticed suspicious movement along the LoC and challenged the intruders, leading to a gunfight in which the two militants were killed.
As the security forces tightened cordon around the area, the hiding militants opened fire at the security forces triggering a gunfight. Three AK-47s and other materials were recovered from the killed terrorists. In the encounter that followed, the three terrorists were killed.
Police, however, have not confirmed whether the slain militants had recently infiltrated into the Valley from Pakistan-administered Kashmir or had been operating here for some time. Two policemen and a Central Reserve Police Force soldier were also injured in the explosion.
Terrorists threw the grenade at a Central Reserve Police Force (CRPF) camp near the bank.