National police spokesman Brig. Gen. Boy Rafli Amar said the two suspects were among fugitives wanted for the assassination of two police officers who were killed last month while investigating terrorist activities in the area.
The two men resisted arrest by throwing homemade bombs toward security forces during the raid at a house in Kayamaya village in Poso district, Amar said.
"They tried to harm the police ... we had to shoot and killed one of them," he said, adding that the other suspect was arrested and taken to a police detention center in the provincial capital, Palu.
Police seized several homemade bombs and other materials during Saturday's raid, Amar said.
The incident came amid a security crackdown in a mountainous jungle area in Poso that is believed to be home to a terrorist training camp. One suspected militant was killed and two others arrested Wednesday.
Poso was a flashpoint for violence between Christians and Muslims that left more than 1,000 people dead in 2001 and 2002. Authorities believe the district is now a terrorist hotbed.
Indonesia has been battling terrorists since the 2002 bombings on the resort island of Bali that killed 202 people, mostly foreign tourists.
Since March, more than 50 militant suspects have been arrested and nine others killed in a series of raids in Indonesia. Some of the suspects had attended a military-style training camp in Poso.