Press TV reports.
The incident happened on Sunday morning after anti-terror police raided a house in the Majengo suburbs of Mombasa.
Deputy regional Police Chief John Gachomo said one suspect was killed inside the house while the other one was shot dead as he tried to escape.
"We killed one suspect in the house and the one we were holding when he tried to run away. Two suspects were arrested during the raid but four more escaped,” Gachomo said.
“We also recovered three grenades, one pistol and 36 rounds of ammunition,” he added.
Kenyan official also said the operations to ensure security will continue in the region.
Meanwhile, angry residents have accused the anti-terror police of extra judicial killing.
“I strongly condemn what the police did to one of our neighbor who was seriously beaten and tortured before he was killed,” a resident in Majengo, Salim Mohamed said.
Muslim clerics have also condemned the violence employed by security forces, saying that such cruel killings are unacceptable.
Over the past months, Kenya has been hit by a series of grenade attacks which are blamed on revenge-seeking militant groups from neighboring Somalia.
Kenya has beefed up security along its border with Somalia since it dispatched soldiers over its border into the conflict-plagued country last October to chase al-Shabab fighters.
Kenyan security forces have shot dead two terror suspects in the coastal city of Mombasa,