Police arrested two suspects and seized four heavy machine guns, 40kg of cocaine and 30kg of marijuana.
 
The five-hour shootout was intense and numerous grenade explosions were heard, Agencia Estado news reported.
 
Jose Mariano Beltrame, the Brazilian state security secretary, said the operations would continue.
 
Gangs and games
 
Last week Luiz Inacio Lula da Silva, the Brazilian president, warned that foreign investors would be frightened away if violence in the slums affected the Pan American Games.
 
Many of the favelas in the city of 11 million are controlled by drug gangs, prompting police to conduct military-style invasions.
 
Rio will host 5,500 athletes from across the Americas as well as an estimated 800,000 tourists.
 
It is also a venue for the global series of Live Earth rock concerts on July 7.
 
Officials hope the events will showcase the city's charms instead of exposing its out-of-control crime.
 
Rio has one of the highest murder rates in the world, with a toll comparable to some war zones.
 
At least 1,800 people were killed in the first four months of 2007 in the metropolitan area, official figures show.
 
Human rights groups have often criticised police tactics of indiscriminate shooting of people they label as "suspected traffickers".
 
The authorities have also been accused of victimising poor slum dwellers.