A railway engineer, his brother and two locals involved in the project near Awantipora, 30 kilometres south of the summer capital Srinagar, were abducted by unidentified armed men while travelling in a car after work Wednesday.
One of the Kashmiris was freed late Wednesday and the other released Thursday, but a hunt was still on for Indian engineer Sudhir Kumar and his younger brother, a police spokesman said.
A police official said the abductors were demanding five million rupees ($111,000) to release the men, who were working on a long-delayed project to connect by rail the Muslim-majority Kashmir Valley around Srinagar to the winter capital Jammu and the rest of India.
A police statement blamed "Muslim" fighters for the abduction even though no one has claimed responsibility.
Muslim insurgents fighting Indian occupied Kashmir have rarely abducted for ransom, although early in 1989 they captured a number of Indian civil servants and relatives of pro-India politicians.
In other incidents in Kashmir, an Indian soldier and three separatists were killed in three separate shootouts overnight, a police spokesman said.
Separately, armed men burst into a house in northern Kupwara district late Wednesday killing a man and injuring a six year old child, who was in critical condition, the spokesman said.
The abductors were demanding five million rupees ($111,000) to release the men
Indian police official
Police also recovered a bullet-ridden body near the town of the central town of Kulgam. The nature of the killing was not immediately clear.
More than 40,000 people have died in the 15 year Kashmir insurgency by official count. Separatists put the toll at double that, between 80,000 and 100,000.