Authorities also disabled mobile internet across the occupied Kashmir region early on Wednesday to forestall large crowds from gathering in the streets to mourn his killing.
"He was trapped in a house and early today a gun battle took place during which he and his associate were killed," occupied Kashmir's Inspector General of Police, Vijay Kumar, told Reuters.
Two fighters were martyred in another gun battle nearby on Wednesday, Kumar added.
A former maths teacher with a bounty of 1.2 million rupees ($15,800) on his head, Naikoo was an aide to Hizbul Mujahideen commander Burhan Wani who was martyred in July 2016, leading to months of unrest. "It is a major success for the troops in Kashmir", Kumar said.