The standoff at an indoor stadium in Srinagar in Indian administered-Kashmir has ended with the killing of the remaining besieged separatist fighter.
The security operation was over by late afternoon on Sunday in the state's summer capital.
Central Reserve Police Force (CRPF) Deputy Inspector-General SS Singh said the slain fighter's accomplice had been shot dead earlier during the day.
The bodies of two paramilitary soldiers have been recovered. They had gone missing during a gun battle that erupted after the two fighters sneaked into a normally heavily guarded sports complex on Saturday.
Firemen found the bodies early Sunday morning when they entered the stadium to extinguish a blaze that had broken out minutes after the operation to flush out the besieged fighters was resumed at dawn.
Hundreds of police and paramilitary forces had completely encircled the indoor stadium from the outside soon after the two fighters forced their way into the complex.
Indian Central Reserve Police
Force forces prepare to attack
Ambulances and fire-tenders were also moved in and kept on standby, witnesses said.
The operation had been suspended on Saturday night based on the calculation that Indian security forces were likely to suffer casualties due to the fact that the fighters had taken positions well inside a two-storey building within the complex housing India's regional passport office.
Security officials said one of the fighters, thought to be from an obscure group called al-Mansurin, might have been killed in retaliatory fire.
The complex was being used as barracks by the military and is close to where a parade is to be held to mark India's Republic Day on 26 January.
At least three security officers were injured in the initial firefight.
The Bakshi Stadium in Srinagar's high-security Wazirbagh district houses the paramilitary CRPF.
Kashmir's inspector-general of police, Javed Ahmad Makhdoomi, said the passport office caught fire during fighting on Sunday morning.
Several other buildings, including hotels, are in the area. Most were requisitioned as temporary barracks for thousands of Indian forces brought in more than 15 years ago to combat the uprising by Muslim rebels.
Kashmiri fighters seeking independence from Indian rule have stepped up attacks in the run-up to Republic Day, which they describe as the "black day".
The area is routinely sealed off by the security forces days ahead of India's national holidays to keep the fighters at bay.