One civilian, who was injured, during a gunfight between the security forces and the terrorists in the Pandoshan village of J&K's Shopian district, succumbed in the hospital, police sources said on Tuesday.
Another civilian and a soldier, who were also injured, were said to be stable.
The encounter broke out on Monday.
"One of the injured civilians identified as Shahid Gani Dar succumbed in the hospital while the other injured civilian is stable.
"Terrorists had fired at the civilians during the encounter in order to escape from the cordoned off area.
"Condition of the injured soldier is also stable," sources said.
Security forces, including the Army, local police and CRPF had started a cordon and search operation in the Pandoshan village on Monday following information about the presence of terrorists there.
Reports from the area said the terrorists had managed to escape. There has, however, been no official confirmation of the terrorists' escape from the encounter site.