“The woman was caught in the crossfire. Her death is unfortunate,” director general of police Dilbagh Singh told reporters.
A paramilitary man was also injured during the firefight, Singh said.
As news of the incident spread hundreds of residents took to the streets, throwing stones at the security personnel who fired tear gas and metal pellets.
The crowd shouted slogans, such as “Long live Pakistan” and “We want freedom”, according to a photographer at the scene.
No injuries were immediately reported from the clashes.
Armed encounters between local men and Indian forces are frequent in occupied Kashmir, but rare in the capital city.
The last such gunfight occurred in June, and left three local fighters dead and 15 houses destroyed in the heart of Srinagar.
Thursday’s incidents came a day after similar protests in northeastern Kashmiri town Sopore, where Irfan Ahmed Dar, 26, was found dead hours after he was detained by police.
Dar’s family allege police tortured and killed him, later dumping his body in an open area.
Police, however, claim Dar was an over-ground associate of Kashmiri fighters and escaped from police custody before he was found dead.
His body was not released to his family, and officers buried him in a graveyard reserved for slain fighters.
At least 192 fighters, 73 Indian forces personnel and 47 civilians have been killed in armed violence this year across the occupied territory.
India and Pakistan have exchanged small arms fire and mortar shells almost daily for months across the Line of Control.
Anxiety and anger have deepened in the restive and occupied region since August last year when New Delhi revoked its semi-autonomous status and brought it under direct federal rule.