Government forces in Indian-held Kashmir killed a top Islamist militant on Thursday blamed for the murder of eight Hindu pilgrims two months ago.

Soldiers and police shot dead Abu Ismael - a top militant of Lashkar-e-Taiba (LeT) - in an encounter in Nowgam, on the outskirts of the main city of Srinagar.

Police last month said their investigations found that the LeT and Kashmiri accomplices were behind the July 10 attack that saw militants open fire on a bus carrying Hindus, who were returning from the annual Amarnath pilgrimage.

"Amarnath Yatra (pilgrimage) attack mastermind terrorist Abu Ismael killed in an encounter at Aarigam, Nowgam," Indian army spokesman Aman Anand told AFP via text message.

A Kashmir police official, who requested anonymity, told AFP that Ismael and his associate were "intercepted in an open field and killed" after receiving a tip-off on their location.

Authorities in the violence-plagued valley snapped mobile internet services after Ismael's killing, fearing an outbreak of protests.

The July attack was the worst in the divided Himalayan region since 2000, when gunmen fired on a group of Hindu pilgrims and killed 32 people including two police officers.

LeT has been blamed for a string of deadly attacks inside India, most notably the Mumbai carnage in November 2008 when heavily armed gunmen battled commandos on the streets of the financial capital, killing 166 people.

Rebel groups, including LeT, have for decades fought Indian troops and police deployed in Kashmir, demanding independence or a merger of the former Himalayan kingdom with Pakistan.

Kashmir has been divided between India and Pakistan since the end of British colonial rule in 1947, but both claim the territory in full.