Another suspect managed to escape from the scene.
According to police sources, the encounter took place in an area of Mominabad during a search operation.
Four terror suspects opened fire on the police party and three of them killed in police retaliatory firing. One attacker managed to escape from the site.
The alleged terrrorists were said to be members of an outlawed group.
Sindh Home Minister Suhail Anwar Siyal has announced cash reward for the police team that took part in the encounter.
Earlier, an intelligence agency claimed to have arrested an alleged agent of the Indian spy agency RAW.
Arif, an employee of Karachi Water Board, was said to be a member of a sleeper cell of the Indian spy agency.
Accused Arif has got training of using weapons and bomb making, sources said. The accused has been handed over to the Counter Terrorism Department (CTD).
The CTD has also arrested five contract killers. The accused had killed a man in Korangi after being paid for murder, police sources said.
Moreover, police arrested 20 suspects during a search operation at Jahangir Road area.
A suspected member of a Lyari gang was arrested near the civil hospital, police sources said.