"No Pakistani soldier had crossed the LoC," a Pakistani military spokesman said, referring to the Line of Control which divides the two nuclear-armed neighbours.
"Indian soldiers wanted to establish a forward post in the area on the Pakistani side of the LoC, which was objected to by our soldiers," it said.
Islamabad also denied reports that four of its soldiers had been killed in the gunbattle.
Anil Kumar Mathur, an Indian army spokesman, said the incident was a "serious violation of the ceasefire".
"It is a very serious issue. The Pakistanis have been violating the ceasefire over the past few months, but this is the first time they physically moved in and killed a colleague of ours."
But Pakistan said it had "material evidence" of the Indian incursion in the form of weapons left behind by fleeing Indian soldiers.
On Tuesday, army officers from the two sides held a "flag meeting" - a formal meeting at which they presented their versions of the incident.
India and Pakistan have fought two of their three wars over the region.
And in 2002 they came to the brink of war again, massing troops along both sides of the border, following an attack on the Indian parliament in New Delhi which it blamed on Pakistan-based groups.
In November 2003, they agreed to a ceasefire along the Line of Control and since then fighting has been reduced to sporadic small clashes. However, New Delhi has made repeated claims that Pakistani troops have been helping anti-Indian groups cross the border.
Armed groups have been fighting India's rule over part of the Muslim-majority region since 1989, although Islamabad insists that it has not offered any support to the groups.
Indian and Pakistani leaders are expected to meet at a forthcoming South Asian summit in the Colombo, the Sri Lankan capital, this weekend.