The shots sparked a fire in the Greenway hotel, situated five kilometers (three miles) from the venue of a conference being attended by Indian Prime Minister Atal Behari Vajpayee in the violence-wracked city.

Firefighters were midmorning still battling to control the blaze at the hotel, which is also less than a kilometer from Chief Minister Mufti Mohammed Sayeed's official residence.

Among the dead was Javed Shah, a former militant-turned-legislator who was running a newspaper "Wattan" (Nation) inside the Greenway where one or two militants had barricaded themselves Wednesday evening.

"The fighting has stopped. We are sure we have eliminated one or two rebels who were in the hotel building," said Kashmir police chief Gopal Sharma.

Sharma was one of the several senior para-military and police officials who supervised the operation. He said damage to the building caused by the fire had made it unsafe, hampering a clean-up operation.

"It may take us some time to bring out the body or bodies of the slain militants," he told reporters at the scene.

Sharma said BSF and police stormed the first two floors of the building around 6:30 am ((0100 GMT) after evacuating some 20 civilians.

Before launching the assault, the BSF, backed by federal and local police, fired a barrage of AK rifle and machine gun fire at the besieged Greenway.

"The militants returned the fire and the heavy exchange continued for several hours, starting around 3:00 am Thursday (2130 GMT Wednesday)," a BSF spokesman, Tirtha Acharya, told AFP.

The rebels, he added, had fired grenades from the building, which houses offices of some small vernacular Urdu newspapers.

"We have recovered three bodies, including that of Javed Shah and his bodyguard," said Sharma.

He said the third body had yet to be identified.

Shah had been on the hit list of rebels since he changed sides in 1994 by deserting pro-Pakistan militant group al Jihad. He joined a pro-India militant group Ikhwan and later became a member of the long-ruling National Conference.

The party during its rule nominated him to the upper house of the state legislator, but he was defeated during last year's state elections.