The militants were killed when a special team of elite police commandoes raided their hideout near the Northern Bypass in the Manghopir area.
"On seeing the raiding party these militants resorted to heavy firing in which the area SHO Ghulam Hussain and a constable Anwar Khan were wounded," senior police official Rao Anwar told reporters.
During the exchange of fire, eight militants were gunned down, Anwar said.
"It appears these militants were planning some terrorist attacks on the occasion of Muharram," he said.
The government has stepped up security in all four provinces with the start of the month of Muharram.