The Tuesday morning raid was carried out by Recce Squad and anti-terror police officers.
Police recovered assorted weapons following the shootout and arrested seven suspects.
According to eyewitnesses, the heavily armed officers arrived in five vehicles in Dudus.
The officers sealed off the area with area residents milling around to catch a glimpse of the dead suspected terrorists.
Meanwhile, police have arrested one of the masterminds of the Dusit D2 attack which happened on January 15, this year.
Fawaz Ahmed Hamdun was apprehended by a multi-agency team on Sunday night in Majengo area, Mombasa county.
The suspect is reported to have been smoked out of his hideout in Majengo.
Apart from planning the Dusit D2 attack, where 21 people were killed, police say that the suspect was also involved in the recruitment of Kenyan youth into the Somali terrorist group, Alshabaab.