SRINAGAR: A policeman was on Wednesday killed and three civilians were injured as terrorists struck in the heart of Srinagar , entering a hotel lobbing grenades. ( Watch Video )

Jamiat-ul-Mujahideen, one of the rebel groups active in the area claimed responsibility for the attack by faxing a statement to the local offices of a news agency. ``The attack is in response to India's propaganda that the armed struggle has weakened in Kashmir,'' the statement said.

As it grew dark, the security forces put up floodlights around the Punjab Hotel building where the militants are holed up. The area has been marked off with concertina wires to ensure the guerrillas do not escape under the cover of darkness.

"We are cautious that no collateral damage takes place," a police officer said.

Police were not sure of any civilian trapped in the hotel building which hindered the prospect of launching the final assault. The militants were using the building as a fortified bunker and firing intermittently at the surrounding security forces.

"The hotel building will have to be stormed by commandoes if the militants refuse to surrender," said a paramilitary officer.

The dead policeman, identified as Mohammed Yusuf who was posted as driver of the Station House Officer of Maisuma Police station, was killed during the attack, official sources said.

Seven persons, including a woman, have been admitted to the SHMS hospital here. "We have received seven persons with bullet and splinter injuries so far. The condition of one of them is critical and he is presently undergoing operation," Chief Medical Officer of the hospital Mushtaq Ahmad said.

While four of them were hit by bullets, the rest had splinter injuries, hospital sources said and identified three as Rouf Ahmad, a cameraman, Zahdish of Srinagar and Mohammad Akbar Lone of Tangmarg. The injured civilians included a cameraman from a television news channel, said Sajad Ahmed, a police officer.

So far over 100 civilians trapped inside shops and other buildings have been evacuated from Court road, Pladium chowk, Koker Bazar and adjoining areas to safer places, a police officer said.

The terrorists, believed to be "fidayeen" (suicide squad), initially lobbed grenades on a CRPF picket at Pladium Chowk and followed it by indiscriminate firing around 2.15 pm.

The CRPF and police personnel deployed in the area retaliated and the militants, whose number could not be ascertained immediately, reportedly took shelter inside a hotel. They opened fire and lobbed grenades on the security forces.

The whole area was immediately cordoned off to neutralize the militants, a police officer said.

The entire area wore a deserted look with reinforcements rushing to the scene to tackle the situation arising out of the attack in the valley in more than two years.

The last suicide attack was carried out in Dal Lake area of Srinagar in October 2007 in which two terrorists were killed and three securitymen injured.

Today's attack came a day after the National Conference-led coalition government completed its first year in office and listed in its achievements, improved security situation.