Seventeen Indian army soldiers were killed after four fidayeen or suicide gunmen attacked the army's battalion headquarters in Uri, 120 kms to the west of the capital Srinagar and near the line of control separating India from Pakistan.
The four militants were also killed. Combing operations are currently underway.
India's defence ministry said a total of 35 soldiers had been wounded in the attack which began at 4 am.
The army had used helicopters to airdrop special forces soldiers and evacuate the wounded after the attack began.
India's army chief General Dalbir Singh Suhag rushed to Kashmir in the wake of the attack, as was India's defence minister Manohar Parrikar who cut short his visit to Goa.
India's interior minister Rajnath Singh cancelled planned trips to Russia and the US.
Keeping the situation of Jammu and Kashmir in mind and in the wake of terror attack in Uri, I have postponed my visits to Russia and the USA
The state of Punjab has also been put on high alert.
The military death toll is the highest in recent years. A similar attack in 2014, also near Uri, had left eight soldiers and four policemen dead.
Kashmir, India's northernmost state, has been on the boil since the killing of Hizbul Mujahideen commander Burhan Wani on July 8. Mass protests broke out immediately afterwards and the curfew that was imposed to try and supress the protests has only recently been lifted.
More than 80 civilians have been killed in clashes between protesters and security forces and as many as 10,000 have been injured.
India accuses Pakistan of supporting militant attacks in Jammu and Kashmir; both countries claim the state in full but rule it only in part.
Pakistan denies any role in cross-border terrorism, and has called on the United Nations and the international community to investigate atrocities it alleges have been committed by the security forces in Kashmir.
The United Nations will soon hold its annual general assembly in New York; Kashmir is expected to figure prominently on the agenda.