Wednesday August 27, 2008  11:16 pm

AP Photo JMU101, JMU102, JMU104, JMU105< ContentType:Spot Development; ContentElement:FullStory; Breaking:True;

By AIJAZ HUSSAIN

Associated Press Writer

SRINAGAR, India (AP) - Government forces killed two Islamic rebels believed to have taken seven hostages, but a third insurgent still held out in the mainly Hindu city of Jammu in Indian Kashmir, a police official said late Wednesday.

At least five people died as gunbattles flared throughout the day - the two militants, a soldier and two civilians - in violence that raised fears militants were trying to exploit unrest that has roiled the Himalayan region for two months.

Senior police official K. Rajendra said security officers killed two insurgents after a daylong standoff that began when gunmen took the hostages earlier Wednesday.

A third militant was still firing on government forces from inside a two-story concrete building in a crowded area on the outskirts of Jammu, the winter capital of India's Jammu-Kashmir state, Rajendra told The Associated Press.

The hostage crisis came as authorities in the Kashmir Valley lifted a three-day curfew for two hours, allowing people out to buy food and other supplies. The curfew as ordered after days of protests demanding an end to Indian rule in the predominantly Muslim region.

Authorities kept the curfew in place in downtown Srinagar, Indian Kashmir's main city, which is considered a stronghold of separatist groups leading the protests.

``We will review how the relaxation hours go and accordingly take a decision for Thursday,'' Masud Samoon, a senior Kashmiri official, told the AP.

Two protesters were shot dead by government forces Wednesday when they defied the curfew to stage anti-India demonstrations on the outskirts of Srinagar and in Handwara, a town 45 miles to the north, said an officer at the police control room speaking on condition of anonymity because he was not authorized to talk to reporters.

Demonstrators hurled rocks at government forces in Handwara, injuring four police officers, said Botlaguduru Srinivas, a senior police officer.

The unrest in Kashmir has left at least 42 people dead, many of them killed by soldiers who have repeatedly opened fire on Muslim protesters during the worst unrest in Kashmir in more than a decade.

The crisis began in June when Muslims launched protests over a government plan to transfer land to a Hindu shrine in Kashmir. The plan was quickly scrapped - angering the region's Hindu minority - but the Muslim protests snowballed into a broader anti-India movement.

Indian officials worry that Islamic militants based in Pakistan, which controls about a third of Kashmir, could use the unrest to sneak across the heavily fortified frontier.

Troops guarding the dividing line have been on high alert, but they apparently missed the three rebels involved in Wednesday's shootout.

Police said the three sneaked into Indian Kashmir early Tuesday after cutting through a 10-foot-high barbed wire fence about 20 miles west of Jammu. They then made their way to Jammu and entered the two-story building and took seven hostages, including four children, Rajendra said.

With the rebels toting assault rifles and rocket-propelled grenade launchers, authorities evacuated the densely populated neighborhood.