UN sources confirmed the attack on Sake, which is located 20km west of the provincial capital of North Kivu.
After several hours of fighting, rebel forces appeared to be pulling back into the bush, said Major Ajay Dalal, a spokesman for the Indian peacekeepers in North Kivu.
"For now, the firing has stopped. We are deployed all around and are supporting the Congolese army but we haven't had to engage yet."
A UN military source said Nkunda's troops had bombarded an integrated brigade of Congo's army, made up of different factions from the country's 1998-2003 civil war, using mortars and rocket-propelled grenades.
As well as the two dead soldiers, 15 others were reported wounded and nine civilians were also injured, Dalal said.
The clashes came after the killing of a member of Nkunda's Tutsi ethnic group raised tensions in Sake and most of the civilian population had fled, another UN official said.
"Between 15,000 and 20,000 people have fled Sake and the surrounding area," said Andrew Zadel, acting head of UN humanitarian co-ordination agency OCHA in North Kivu.
"For now we are hoping the situation will calm down and these people will be able to go back soon - maybe in the morning."
Al Jazeera's correspondent John Cookson met Nkunda, who is wanted by the UN for alleged war crimes, in a secret location in eastern Congo and interviewed him. "We are not against the international policies. So why do they want to bring me to the [tribunal in] Hague?" he said.
"Ours is the most secure area. I have the most disciplined forces in Congo."
The conflict in eastern Democratic Republic of Congo continues to displace tens of thousands of people, despite a 2003 peace deal which officially ended the war and paved the way for this year's historic elections.
The five-year war caused a humanitarian catastrophe which killed an estimated four million people, mainly through hunger and disease.
Its effects are still being felt and more than 1,000 people die each day in Congo, making it the world's worst humanitarian disaster, the UN estimates. Many of the human-rights abuses are committed by the poorly paid and ill-disciplined army.
On Friday, UN investigators announced the discovery of a mass grave in an army camp in eastern Congo holding around 30 victims, including women and children, who appeared to have been recently executed.
First free polls
This year's UN-backed elections, Congo's first free polls in more than 40 years, were aimed at cementing peace in the vast central African country.
However, supporters of former rebel leader Jean-Pierre Bemba rioted in Kinshasa, the capital, this week after he refused to accept defeat in last month's runoff and accused Kabila of "massive fraud".
The country's supreme court continued hearing his appeal on Saturday, only four days it was attacked by a pro-Bemba mob.
Thousands of Bemba's supporters took to the streets on Friday night as a rumour circulated the election result had been overturned in his favour. There were no reports of violence.