Indonesia is "convinced" one of Asia's most wanted men - a bomb expert thought to have been behind the 2002 Bali attacks - has died, says the president.
The house is being swept for booby-traps before police enter
Malaysian Azahari Husin and two other militants are believed to have blown themselves up after police surrounded their house in Malang, East Java.
One officer reportedly identified Azahari after finding his remains at the site, but DNA tests will be taken.
Australia, which lost many citizens in the Bali bombings, welcomed the news.
Azahari is believed to have built the bombs which killed more than 200 people - 88 of them Australians - on the tourist island.
Known as "Demolition Man" in his native Malaysia, he is suspected of masterminding other attacks.
And, along with fellow Malaysian, Noordin Mohammad Top, he is said to be a key member of the militant group Jemaah Islamiah (JI).
A BBC correspondent in Jakarta, Tim Johnston, says Azahari was known to be a master of disguise.
If his death is confirmed, it is likely to deal a major blow to the JI's network, our correspondent says.
"We are convinced it is Azahari," President Susilo Bambang Yudhoyono said. "But we need to carry out laboratory tests."
Australia's Federal Police Commissioner Mick Keelty said Azahari's head had remained in tact after the blasts and was recognised by an officer who had been hunting him for years.
Azahari had narrowly escaped capture in the past
"If he is confirmed as being the person who died in this operation yesterday... it will make a big dent in the operations of the radical terrorists groups in Indonesia," he told Australian radio.
The incident happened when police tried to raid a house in Batu, near the city of Malang in East Java on Wednesday.
Three men were in the house and reportedly put up stiff resistance, throwing grenades at the police outside.
They set off several explosions and fired at police.
"The last one, the big one, was a suicide blast, that is the one that killed them," Gen Sutanto told reporters at the scene.
He said the house was being swept for booby-traps before forensics officers could go in and retrieve the corpses for DNA tests.
One police spokesman said the house had been under surveillance for the last 10 days after a tip-off from an arrested terrorist suspect.
Azahari Husin, a trained engineer, once worked as a university lecturer in Malaysia and gained a doctorate in property valuation from the UK's University of Reading.
A married father-of-two in his late 40s, he is said by some to have been a fanatic, ready to die for his cause.
Azahari, and his alleged accomplice Noordin Mohammad Top - whose whereabouts are still unknown - have been on Indonesia's most wanted list for years, for a string of bomb attacks in the country.
As well as being the suspected mastermind behind the Bali attacks, he and Noordin Mohammad Top were also wanted in connection with an attack on Jakarta's JW Marriott hotel in 2003, and one on the Australian embassy in 2004.