Six police officials have also sustained injuries in the exchange of fire, Dawn online reported.
Lashkar-i-Jhangvi chief Malik Ishaq and his sons were arrested by the counter-terrorism department recently.
Police team was attacked when Malik and others were taken to Muzaffargarh by the counter-terrorism department to aid in the recovery of arms and explosives.
Malik and his sons managed to flee with their supporters. Later the other police team was informed and encounter took place on Tuesday.
Lashkar-i-Jhangvi is considered as the most extreme Sunni terror group in Pakistan and is accused of killing hundreds of Shias after its emergence in the early 1990s.
The organisation banned by former president Pervez Musharraf is said to have links with Al Qaeda.
A huge cache of weapons and ammunition was recovered from the attacking men and an investigation has been initiated into the encounter.