Asif Maqbool Bhatt belonged to Lashkar-e-Taiba (LeT), a Pakistan-based group designated by the UN as a terrorist organisation, senior local police official Munir Khan told AFP.
"He hurled a grenade at the police team in Sopore region on Wednesday morning. He was killed in retaliation," Khan told AFP.
Tensions have heightened in Kashmir since New Delhi stripped its part of the Himalayan region, split between India and Pakistan since 1947 and the source of several conflicts, of its autonomy of August 5.
India also sent thousands of extra troops to reinforce the 500,000 already there, detained almost all the region's politicians, severely restricted movement and cut landlines, mobile phones and the internet. Some restrictions have since been eased.
UN rights chief Michelle Bachelet said on Monday she was "deeply concerned about the impact of recent actions by the government of India on the human rights of Kashmiris".
India's national security adviser said Saturday that a "majority" of Kashmiris supported its move except for a "vocal minority" backed by Pakistan, which he said has readied 230 militants to infiltrate Kashmir.
Bhatt is believed to have been involved in the recent attack of family members of a local apple trader -- a mainstay of the local economy -- who India says have been put under pressure by militants not to send their fruit elsewhere in India.
Tens of thousands of people, mostly civilians, have been killed since an uprising -- blamed by New Delhi on Islamabad -- against Indian rule erupted in 1989.
LeT claimed responsibility for a suicide bombing in Kashmir in February that killed 40 Indian troops, and has been accused by India and the United States of carrying out attacks in Mumbai in 2008 that killed 160 people.
Last week senior Indian army officer Lieutenant General Kanwal Jeet Singh Dhillon said two Pakistani "terrorists" had been arrested in Kashmir.
Showing film footage of the men, Dhillon said: "These videos clearly show how citizens of Pakistan are being pushed into the Kashmir Valley to undertake terrorist activities... to disrupt peace."
Pakistan's foreign minister demanded in Geneva on Tuesday that the UN launch an international investigation into the situation in Indian Kashmir, warning of the risk of "genocide".