Three others, including a captain, have been injured, the police said.
Itoo was one of the longest surviving militants and was considered as the Hizb's top commander in south Kashmir, police sources said.
The other two militants killed in the gunfight have been identified as Umar Majeed and Sheikh Irfan-ul-Haq.
Groups of people had earlier relocated to the encounter site and made repeated attempts to help the holed-up militants to escape the security dragnet, the witnesses and officials said.
"One of the terrorists killed today morning at Shopian is identified as Yasin Itoo; operational commander of Hizbul Mujahideen".
Yatoo was a resident of Chadoora in Budgam district and had joined militancy in the year 1997.
Since January the police and the army have killed four top militant commanders having huge operational capabilities.
Five army soldiers were injured in the gunfight.
Separately, in north Kashmir's Bandipora, two policemen were wounded when they were shot by suspected militants, and a civilian succumbed to his injuries from a petrol bomb attack in Srinagar.
Rising Kashmir has learnt that dozen of people have also sustained pellet injuries during the overnight clashes wth the state government forces. During the search operation, terrorists hiding in the area fired upon the joint search party.
Internet services have been blocked in Badgam district following the identification of Itoo among the slain militants.