Cops also gunned down a terrorist during the encounter whose identity is yet to be established. The martyred SPO has been identified by the police as Billal.
The police said the injured sub-inspector, Amardeep Parihar, has been admitted to a hospital for treatment.
The gun battle between security forces and armed militants, which had begun on Tuesday evening, had continued into the night.
At 5:30 a.m. on Wednesday, the Jammu and Kashmir police tweeted that the encounter was over.
"Encounter is over. One terrorist killed. Identity being ascertained. Arms and ammunition recovered. Our colleague SPO Billal attained martyrdom. SI Amardeep Parihar injured in the incident is being treated at Army Hospital," stated the police in the tweet.
Security agencies were involved in heavy exchange of gunfire with the terrorists in the encounter. The firing had begun with the militants at around 5 p.m. in Old Baramullah and the area was cordoned off for the public.
This was the first encounter between security forces and terrorists ever since the Union government abrogated special category status to Jammu and Kashmir on August 5 by reading down Article 370 of the Indian Constitution.
Kashmir valley has been by and large peaceful apart from stray incidents of stone-pelting and protests since August 5. The number of ceasefire violations by Pakistan across the LoC have increased, however, over the past week after a lull in the first fortnight of August.
( With inputs from IANS )