Two children were killed when a militant involved in the attack on the Shalimar Express fired indiscriminately during a standoff with security forces at Akhnoor, about 25km from Jammu on Tuesday, official sources said.
Seven persons were also hurt when the militant entered the Military Engineering Service residential area and opened fire.
Two of his associates were killed on Monday.
The injured were taken to a hospital, sources said, adding army authorities evacuated the entire residential area.
The exchange of fire was still on, they said.
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