The attack at Sowjaina in Poonch, a frontier district some 240km northwest of the state's winter capital Jammu, is the latest in a series of blows struck by separatists.
This week's killings formed a bloody backdrop to a tour of the frontier areas just completed by the Indian defence minister, Pranab Mukherjee.
India is building a 12ft-high barbed-wire fence along the Line of Control (LOC), the de facto border that splits the disputed Himalayan province between India and Pakistan.
The stated purpose of the fence is to seal off the rugged frontier against infiltration by separatists fighting Indian rule in Kashmir.
It is believed the assailants entered the Indian side of the LOC specifically to target members of the army engineering corps that has been assigned the task of erecting the Sowjaina portion of the fence.
Indian military officials said a nearby security patrol which went to the aid of the army men also came under fire from the attackers, resulting in the death of one border guard and injuries to three others.
Recent gun battles have taken a
tragic toll on Kashmir's civilians
The gun battle between the armed fighters and Indian security forces continued amid heavy rains that have been lashing the area since Wednesday morning.
Despite the upsurge in violence, a senior Indian government figure played down talk of Pakistani involvement before winding up his two-day visit to the region.
Defence Minister Pranab Mukherjee said the truce between the two armies has been holding since November 2003 and this in itself is an encouraging sign.
"It has created a conductive atmosphere for the peace initiative … and may even defuse tensions," he said.
"The resumption of talks too is a sign that we are moving in a positive direction," he said in Srinagar, the summer capital of Kashmir, before returning to New Delhi.
Continuing high-level visits have
de-escalated Indo-Pak tensions
Saying that the fencing work was nearing completion, Mukherjee expressed hope that the new barrier - together with increased surveillance by Indian troops - would be able to stop undesirable cross-border movement.
But the minister conceded that fence-building is just one exercise in infiltration prevention. Given the porous border and local topography, some amount of infiltration will probably continue to take place, he said.
The violence in Indian-administered Kashmir shows no sign of abating.
In an overnight operation at Saim Simat in Rajouri district, Indian police and troops killed two suspected Pakistani fighters from the Jaish-i-Muhammad group, police said.
Also on Wednesday, three civilian deaths were reported from different parts of Kashmir.
Kashmir police have lost several
officers in clashes with rebels
In Srinagar, police found the bullet-riddled body of a local resident lying in a paddy field.
In the northwestern Baramulla district, a high-school student was shot dead by unidentified men.
And in Udhampur district in the southeast, a local resident picked up from his home by unidentified men was found dead.
All three victims were Muslims, according to Kashmir police.