Eight others were injured, four of them critically, in the shooting early on Saturday, Indian police have said.
The killing, all of members of a Village Defence Committee (VDC) and their relatives at Maraha in Surankote area of frontier Poonch district, comes ahead of India and Pakistan's foreign secretaries meeting in New Delhi.
This will be their first attempt in three years to resolve their disputes, including those related to Kashmir.
According to reports, a group of heavily armed men descended on the village, about 20km from Surankote town, shortly after midnight on Friday and clashed with the VDC members.
When the shooting ceased, a few hours later, ten people, all Muslims, were found dead.
Eight of the slain men were VDC members. The two others were a woman and child, police chief Gopal Sharma said.
Sharma said it was not yet known whether any fighters "who were reported to have been engaged in a pitched battle by the VDC members" were killed or injured as well.
On Saturday morning, an army helicopter was sent into the forest area, to airlift the injured.
"Four persons have been seriously injured and are being brought to Jammu for specialised treatment," said a senior officer, speaking from the state's winter capital.
Another helicopter transported senior police and administration officials into the area, who would oversee the rescue operation and also investigate the incident, officials said.
Bodies of a railway engineer and
his brother were found days ago
Kashmiri authorities have encouraged residents of remote areas to form what has become known as "village defence committees".
This came after separatists fighting Indian rule over the predominantly Muslim state spread their activities beyond the fertile Vale of Kashmir, a decade ago.
The predominantly Muslim Vale has been the hub of the pro-independence campaign but over the years the separatists have become equally active in other areas, particularly twin districts of Poonch close to the de facto border with Pakistan and also in Doda in the east.
The members of these committees are provided with firearms and ammunition by the government to protect remote villages from attacks by the fighters.
However, complaints of misuse of authority by some of these committees, particularly in the mountainous Doda district, to settle personal and community scores, have emerged.
Meanwhile, the engineers and other staff of Indian Railways construction wing IRCON have gone on strike for one day in protest at the killing of a colleague and his brother a couple of days after they were seized at gunpoint in southern Pulwama district.
Sudhir Kumar Pundeer, 30, and his younger brother Sanjay Kumar, along with two locals, were seized by unidentified gunmen on Wednesday. The captors had demanded approximately $110,000 in ransom for setting them free.
However, the two locals, including a contractor and driver were freed unharmed hours after being abducted. Site engineer Sudhir and his brother were murdered, while a massive search operation by police and other security forces was underway in the area.
Chief minister of the state, Mufti Muhammad Said, described the killing as a blot on Kashmir and said it was part of the "conspiracy" to ruin the state's economy.
More than 40,000 people have died in the 15-year conflict in Kashmir. Local human rights and political groups, however, put the death toll as twice as high.