The corpses of the engineer, Sudhir Kumar Pandeer and his brother Sanjay Kumar were discovered by farmers in a deserted enclosure on Friday at Sugan in southern Pulwama district.
Two others who were seized along with the engineer and his brother were freed unharmed hours after their abduction.
Soon after the kidnapping on Wednesday, a senior official of the Indian Railways construction wing- IRCON-in the state's summer capital, Srinagar, reported receiving a phone call in which five million Indian rupees ($110,000) was demanded as a condition to set the two free.
The caller did not say when and where the money had to be delivered.
"It is a blot on the fair name of Kashmir and part of the conspiracy to choke its economy"
Mufti Muhammad Sayeed,
chief minister, Indian-administered Kashmir
Officials said that IRCON employees and local contractors had in the past been abducted for ransom.
The Indian Government is setting up a railway line between the town of Qazigund in the south and Baramulla in the north, a distance of more than 100km.
Due to be completed in 2007, the project will give the Valley – atop the Himalayas at an average height of 1524 metres - its first ever rail network.
Reacting to the killing, Chief minister Mufti Muhammad Sayeed said he was shocked. "It is a blot on the fair name of Kashmir and part of the conspiracy to choke its economy," he said.
Meanwhile, in separate incidents occurred across the state on Friday, two separatist fighters and a policeman were killed in clashes.
The fighters were killed in a shootout with Indian troops at Budhal, a remote village in Rajouri district.
Yasin Malik was arrested in
Police on Friday arrested pro-independence Jammu Kashmir Liberation Front-JKLF-leader Muhammad Yasin Malik along with 50 activists and supporters in northwestern Baramulla town amidst fisticuffs. Two police officials and two activists were injured, witnesses and officials said.
Malik and his followers were in Baramulla to resume the JKLF's signature campaign for its demand that the people of Kashmir, being the "principal party" to the dispute over the state, should be involved in talks between India and Pakistan.
The 15-year-old armed conflict in Kashmir has claimed more than 40,000 lives according to official Indian sources. Local human rights and political groups put the death toll twice as high.