Police said two heavily armed Kashmiri fighters on Saturday hurled grenades and forced their way into the complex in Srinagar being used as temporary barracks by the paramilitary Central Reserve Police Force (CRPF).
"Our boys are attempting to flush them out - dead or alive," an officer of India's main paramilitary Border Security Force (BSF) said.
A paramilitary spokesman added: "Three CRPF personnel guarding the entrance to the stadium have been injured. We have completely ringed the stadium complex from the outside."
Javed Makhtoomi, the state's inspector general of police, said security forces would resume their operations early Sunday.
"The operations will be resumed at daybreak on Sunday as there may be more casualties if we try and oust the rebels tonight," he said.
Aside from the soldiers' barracks, the stadium complex houses a passport office and other federal government buildings.
Kashmiri fighters seeking independence from Indian rule have stepped up their attacks in the run-up to the Indian Republic Day on 26 January. The day is observed as a "black day" by separatists.
Close to the scene of fighting is the Bakshi Stadium where arrangements are under way for the main ceremonial parade to mark India's Republic Day.
As a routine, the area is sealed by security forces days ahead of national days in order to keep separatist fighters out.
Al-Mansurin, an obscure armed group, telephoned a local news agency to claim responsibility for the latest attack.
The caller who identified himself as Abu Huzaifa from said two of his group's fighters, Naeem Ahmed and Muhammad Sabir, both local Kashmiris, were fighting the "infidels" inside the complex.
Earlier during the day, a civilian died and at least 11 people were injured when rebels tossed a grenade at a rally for municipal elections to be held in Srinagar next month after a gap of 20 years.
Separatists oppose any elections, saying polls are no substitute for the right of Kashmiris to self-determination.