About 50 police and soldiers raided a house in Ban Su Peh in Narathiwat's Rueso district around 2pm after authorities were told by an informant that a group of key insurgents, including Abdul, were hiding there.
As they were approaching the house, the troops were spotted by the insurgents who opened fire, triggering a fierce exchange that lasted about 15 minutes.
As the battle raged, Pol Lt Col Atipat Supanwiwat and Pol Sgt Maj Wichit Otthon were gunned down and Pol Sgt Yothin Chantaradet was injured.
The exchange ended when seven insurgent suspects surrendered and came out of the house.
In the house, four suspects were found dead, one of whom was identified as Abdul, who faced more than 10 arrest warrants for violent attacks in Rueso district.
Two of the other dead were Masupien Salae and Usman Dengsamae.
The fourth insurgent still has not been identified.
Two pistols and an AK47 rifle, as well as more than 100 rounds of ammunition were found in the house.
In a separate operation, soldiers arrested two men suspected of being involved in a bomb attack that killed four military officers on Oct 2 in Yala's Krong Pinang district.
The two are Dolo Bueraheng and Aha Maso, who are suspected of having a role in a bomb attack that killed eight soldiers in June.
They have denied the accusations. (Story continues below)
Meanwhile, Deputy Prime Minister Pracha Promnok said Saturday the five demands made by Barisan Revolusi Nasional (BRN) during the southern peace negotiations were "acceptable overall", however he insisted the details still needed thorough examination.
Pol Gen Pracha, who oversees security affairs, said after meeting with 32 advisers in Narathiwat during a visit that the next round of peace talks had been set for Oct 20 in Kuala Lumpur.
"The five demands of the BRN look acceptable overall, but agreement is not 100%," he said.
The comments came after he chaired the meeting at Princess of Naradhiwas University in Narathiwat's Muang district.
Army chief Prayuth Chan-och, however, insists the demands made by the BRN are unacceptable.
The BRN's first demand is for authorities to acknowledge them as representatives of the "Melayu Pattanis", people of Pattani land, in the peace talks.
The second demand is that the government accepts Malaysia as the peace talks mediator.
The group also wants Asean members, the Organisation of Islamic Cooperation and NGOs to be allowed to witness the talks.
It demands also that the government release all detained suspects and suspend and revoke all arrest warrants concerning national security cases without condition.
Its final demand is for it to be recognised as a liberation movement, rather than a separatist group.
Pol Gen Pracha said the demands concerning the Melayu Pattani people and the release of insurgent suspects would not be easily agreed to.
If the BRN is "not open-minded to proposals from the Thai side", negotiations will bog down, he said.
Meanwhile, security authorities denied reports that the leader of the BRN negotiation team, Hassan Taib, would step aside for his close aide Arwae Yaba or a key insurgent leader Sapae-ing Basor.
In the latest talks with Malaysian officials, this was not confirmed, National Security Council secretary-general Paradorn Pattanatabut said.
Lt Gen Paradorn said he was aware of some "disunity" among insurgent groups, each of which want a change in negotiators to allow a more pro-active approach in the dialogue.