Police said one or two gunmen had taken up positions in a city centre hotel which was quickly surrounded by heavily armed members of the security forces.

"We are trying our best to evacuate people," a police officer at the scene told AFP. Three civilians were reported injured in the fighting.

Local resident Joginder Singh said the gunmen appeared to be directing their fire at a paramilitary camp near the hotel in Srinagar's busy Lal Chowk district.

A pro-Pakistan militant group, Jamiat-ul-Mujahedin, said it was behind the assault.

"Three of our men have launched a fidayeen (suicide) attack in Lal Chowk," the group's spokesman Jameel Ahmed told AFP by telephone from an undisclosed location.

The last such attack in the city was staged by militants in October 2007, during which two gunmen who stormed a paramilitary camp in Srinagar were killed and three soldiers wounded.

Wednesday's assault came as Indian Kashmir's chief minister marked his first year in office by pledging to slash the security force presence in the revolt-hit Muslim-majority region if militant violence continued its recent downwards trend.

Incidents of unrest in Kashmir, wracked by a Muslim separatist insurgency for two decades, were down by about 25 percent last year, police say. India last year responded by pulling out some 30,000 troops from the Himalayan region.

Kashmir is divided into Indian- and Pakistani-controlled zones and has been the trigger for two wars between the South Asian rivals since their independence from Britain in 1947.

Earlier Wednesday a suicide bomber had killed three Pakistani soldiers near the demarcation line with India in Kashmir, the latest in a spike of attacks in the Pakistani-administered zone.

The bombing occurred one day after Pakistani President Asif Ali Zardari had visited the area -- a fault line that has distracted Pakistani attention from an expanding Taliban menace along the Afghan border.

The attacker detonated his explosives outside a barracks in Tarar Khal, southeast of Muzaffarabad, the capital of Pakistani-administered Kashmir.

The separatist insurgency in Indian Kashmir has left more than 47,000 people dead since 1989.

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