The area has been cordoned off and combing operations started to track down terrorists, police said.
At least two soldiers were injured after terrorists today opened fire on an army convoy on the outskirts of Srinagar city this afternoon.
The gunmen attacked an army convoy near a hospital when it was passing the Parimpora Panthachowk bypass road in Bemina area. The troops retaliated the fire but attackers managed to escape. They have reportedly taken shelter in the neighbourhood.
The area has been cordoned off and search operation was immediately launched by the security forces to track down the attackers.
No casualties have been reported in the attack, a police official said.
Minutes before the attack, gunshots were heard in the commercial hub of Lal Chowk in Srinagar triggering panic. But it turned out to be situation of security paranoia. Cops had fired few rounds in the air to stop a mentally-challenged person wearing a mask who created panic among people.
As soon as the man entered a hotel, security forces mistook him for a suicide attacker. Troops stationed nearby opened fire as Jammu and Kashmir is on high alert after threat of a possible attack in the wake of Prime Minister Narendra Modi's visit to Jammu and Kashmir on Sunday. PM Modi is inaugurating the country's longest road tunnel along Srinagar-Jammu national highway.
The incident created panic in the busy market place and people ran for safety.
But when hotel staff informed police that the masked man was not a terrorist, police entered the hotel and captured him.
Soon after he was arrested, there were massive clashes in the area. Crowds threw stones at security forces as police resorted to intense teargas shelling and used chilli grenades to disperse the mob.