A young man was killed and two other people wounded when India's army fired at a funeral of a rebel in disputed Kashmir on Saturday, police and residents said, as seven rebels and an Indian soldier were killed in gunbattles in the region.

Soldiers descended on a village in the suburbs of southern Shopian town as thousands gathered to participate in the funeral of a rebel killed along with four others in a gunbattle with government forces in a neighbouring village early on Saturday, police said.

Police said the soldiers were acting on a tip that a group of militants had come to the funeral and came under a barrage of stones thrown by local residents.

Locals said clashes erupted after soldiers fired live ammunition at the funeral procession, killing one person.

Earlier, army soldiers and counterinsurgency police cordoned off a neighbourhood in the suburbs of southern Shopian town overnight, leading to an exchange of fire with rebels, police said.

One militant was killed overnight while four more died early Saturday.

The fighting sparked protests and clashes as hundreds of residents tried to march to the site of the battle to help the militants escape.

Government forces fired warning shots, shotgun pellets and tear gas at the stone-throwing protesters, injuring at least 15 people, three of them critically.

India and Pakistan each administer part of Kashmir, but both claim it in its entirety.

Rebels have been fighting Indian control since 1989. India accuses Pakistan of arming and training the rebels, a charge Pakistan denies.