The incident took place after midnight in Gadela forests in Obulavaripalle mandal of the district.
A joint party of police and forest officials engaged in combing operations against red sander cutters spotted a group of labourers hired by smugglers. The labourers hailing from neighbouring Tamil Nadu attacked the police and the forest team with stones.
The police opened fire in self-defence, killing two labourers. About 100 other labourers escaped into the dense forests.
It was the latest in a series of clashes between police and red sander cutters in Seshachalam forests spread over Chittoor and Kadapa districts.
On Aug 2, police had gunned down a smuggler, said to be from Tamil Nadu, at Devarakonda in Chittoor district while over 200 others, including hired labourers, escaped.
According to officials, 500 hired labourers and smugglers last week trespassed into Seshachalam forests, known for the precious red sander species.
As many as nine smugglers and hired labourers have been killed in separate incidents in the forests this year.
The police and forest personnel launched a drive to flush out smugglers after the red sander cutters killed two forest officials in December last year.
The rare wood, which fetches Rs.25 lakh per tonne in the international market, is mainly used in aphrodisiac drugs and for making musical instruments and furniture.