The Indian army officer was killed in the north of the valley of Kashmir after a fierce firefight erupted between the two sides.
Other reports confirmed by local police sources said that another officer and a soldier also died in the ambush.
Two soldiers went missing during the fighting.
An Indian army major and two of his juniors were killed on Sunday in the clashes at Nadihal, a small village outside the town of Bandipore in northwestern Baramulla district, that has a common border with Pakistan-administered Kashmir.
Officials said troops from the Indian Army's 5 Jat Rifles were on a surveillance mission in the area when they learned about the presence of a large group of fighters at Nadihal.
As they began to enter the village, the troops were ambushed by the fighters wounding Major Yogesh Sharma and some of his colleagues.
A police handout issued in the capital city of Srinagar on Monday said the officer died of his wounds while being transported to hospital. "The firefight was still on and further details are awaited," the statement read.
Local police officials said apart from the major, a subedar (a military commissioned officer) and a soldier also died in the ambush.
Reports from Bandipore say the troops chased the attackers, who took up positions in a nearby house owned by Abid Ali Butt, a resident of the city.
Indian troops are battling more
than a dozen separatist groups
A fierce encounter ensued, which continued overnight on Monday until the morning when the troops fired mortars into the house and stormed it with machine guns, the officials said.
A bullet-riddled corpse retrieved from the smouldering debris later was stated to be that of one of the fighters.
Although Indian army officials said two separatists had been killed, only one body was recovered.
Earlier, the troops rescued a labourer hailing from India's central province of Bihar trapped inside the house while working there, officials said.
Jamiat al-Mujahidin, one of the several separatist groups fighting Indian rule over the predominantly Muslim state, said in a faxed statement to a local news agency that its area commander was holding an "important meeting" with his counterpart from Jaish-e-Muhammad, another separatist group, at Nadihal when the troops laid siege to the village.
"The mujahidin succeeded in breaking the army cordon and came out of Nadihal after killing 14 soldiers, including the major," it said, adding that some of the fighters might have been trapped inside.
Earlier on Sunday evening, counter-insurgency troops Rashtriya Rifles killed a fighter who officials said was a Pakistani national in a firefight at neighbouring Samlar.
The officials said the slain fighter belonged to the Jaish and that a local Muslim woman, Hanifa Begum, sustained injuries during the shootout.