Thousands of troops are being deployed by both sides
The attack came only five days after a major assault on another army camp in Kashmir, which left more than 30 people dead and triggered a new crisis in relations between India and Pakistan.
India accused Pakistani-backed militants of carrying out that attack, and on Saturday ordered the expulsion of the Pakistani High Commissioner in retaliation.
As both sides traded fire over the disputed border, Delhi announced on Sunday that it was stepping up mobilisation in Kashmir, with paramilitary forces there being transferred from the command of the interior ministry to that of the army.
Both India and Pakistan have massed large numbers of troops along the Line of Control (LOC) in Kashmir.
Pakistan's Information Minister, Nisar Memon, said there were no plans to retaliate on the diplomatic front and Islamabad was hopeful the current crisis could be resolved peacefully.
Indian police said three militants stormed into the camp near Reasi in Udhampur district, some 150 kilometres (90 miles) north of Jammu, throwing grenades and firing indiscriminately.
Three soldiers and one paramilitary policeman died. One of the militants was also killed, but the other two escaped.
Sunday's incident follows a suicide attack on an Indian army camp at Kaluchak in Jammu and Kashmir last Tuesday in which 35 people, including a number of women and children, were killed.
Accusations
In response, India has expelled Pakistan's high commissioner in Delhi, Ashraf Jehangir Qazi, who is to return home later this week.
On Sunday, Indian Prime Minister Atal Behari Vajpayee, who has been facing strong calls in parliament to take action, met opposition leader Sonia Gandhi to discuss the Kashmir crisis.
No details of their discussions were disclosed, but the Congress Party leader has expressed full support for the Pakistani diplomat's expulsion.
Delhi has said the militants who carried out Tuesday's massacre had the backing of Pakistan, and has accused Islamabad of failing to carry out its pledge to clamp down on such groups.
But Pakistan says it has banned extremist Kashmiri groups and rounded up many of their members, alleging that those who carried out the attack in Jammu were indigenous fighters.
Correspondents say that exchanges of fire across the Kashmiri LOC are not rare but, given the current tensions, they have the potential to escalate into a wider conflict.
The increased deployment of troops followed an attack on the Indian parliament in December.
India withdrew its high commissioner from Pakistan at the time and demanded the extradition of 20 "terrorists" and an end to "cross-border terrorism."
The United States, the country with the most influence in the region, has sent several emissaries to try to lower tensions between the nuclear-armed rivals.