The attack came as India and Pakistan began talks in Islamabad aimed at resolving their dispute over the troubled region.
Another policeman was seriously wounded in the attack in Srinagar, the summer capital of Indian-administered Kashmir.
"Militants fired on Gulam Muhammad Dar, a senior activist of People's Democratic Party (PDP), in Hyderpora, killing him on the spot," a police spokesman said. "A policeman also died in the shootout." Hyderpora is an upmarket residential area.
No group has claimed responsibility, yet, for the attack on the PDP activist. The PDP heads the ruling coalition.
Violence rages unabated in the strife-torn region despite a new attempt for peace between India and Pakistan, who came to the brink of a third war about Kashmir in mid-2002.
New Delhi accuses Islamabad of fomenting violence in Indian-administered Kashmir. Pakistan denies the charges.